Working Paper: NBER ID: w2133
Authors: Stephen J. Turnovsky
Abstract: This paper analyzes the effects of an increase in the monetary growth rate within a dynamic optimizing macroeconomic model. Both the short-run and long-run effects, and therefore the adjustments along the transitional path, depend critically upon the tax structure and the firm's corresponding optimal financial decisions. With all bond financing, the effects depend upon the extent to which interest payments are tax deductible for corporations. If this is sufficiently high, the effects of an increase in the monetary growth rate are generally expansionary. With low interest deductibility, or if the tax structure induces equity financing, the effects arc generally contractionary.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary growth rate (O42) | Cost of capital (G31) |
| Monetary growth rate (O42) | Capital-labor ratio (J24) |
| Monetary growth rate (O42) | Economic activity (E29) |
| Tax structure (H20) | Capital-labor ratio (J24) |
| Tax structure (H20) | Economic output (E23) |
| Tax structure (favoring bond financing) (H74) | Capital-labor ratio (J24) |
| Tax structure (inducing equity financing) (H29) | Capital-labor ratio (J24) |
| Interest deductibility (low) (G51) | Capital-labor ratio (J24) |
| Tax structure (H20) | Employment (J68) |
| Tax structure (H20) | Output levels (Y10) |
| Monetary growth rate (O42) | Inflation (E31) |