Do tax distortions lead to more indeterminacy? A New Keynesian perspective

Abstract

Following the recent developments of the literature on stabilization policies, this paper investigates the effect of tax distortions on equilibrium determinacy in a New Keynesian economy with rule-of-thumb consumers and capital accumulation. In particular, we focus on the inter-action between monetary policy and tax distortions in supporting the saddle-path equilibrium under the assumptions of balanced budget and monetary policy satisfying a Taylor rule.rule-of-thumb consumers, equilibrium determinacy, fiscal and monetary policy inter-actions, and tax distortions