Tax on Inflation Policy at the Zero Lower Bound
IMF Working Papers, March 27, 2026
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Bibliographic details
- Authors: Damien Capelle, Yang Liu
- Published: March 27, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229043533.001
Overview
- Title: Tax on Inflation Policy at the Zero Lower Bound
- Authors: Damien Capelle, Yang Liu
- Publication type: IMF Working Papers
- Date: March 27, 2026
- Pages: 76
- Volume: 2026
- Issue: 059
- Series: Working Paper No. 2026/059
- DOI: https://doi.org/10.5089/9798229043533.001
- Stock No: WPIEA2026059
- ISBN: 9798229043533
- ISSN: 1018-5941
- Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Research question and model
- Evaluates effectiveness and robustness of a Tax on Inflation Policy (TIP) for improving welfare at the Zero Lower Bound (ZLB) in a New Keynesian model.
- Uses a medium-scale model calibrated to Japan to quantify a robust TIP rule.
Key findings
- When the ZLB results from a fall in the neutral interest rate:
- A negative TIP mitigates deflationary pressures.
- A negative TIP narrows the output gap.
- A negative TIP implements the constrained-efficient allocation.
- When the ZLB is driven by self-fulfilling expectations:
- TIP can eliminate the deflationary equilibrium altogether.
- A rule that responds aggressively to inflation with a negative intercept proves robust across scenarios.
- Using the Japan-calibrated medium-scale model, the authors quantify a robust TIP rule that would have lifted the economy out of its liquidity trap.
Subjects and keywords (as provided)
- Subject: Asset and liability management, Deflation, Financial services, Inflation, Liquidity, Output gap, Prices, Production, Zero lower bound
- Keywords: cost-push shock, Deflation, Externality, Global, Inflation, inflation rate, inflation-targeting TIP, interest rate, Liquidity, Liquidity Trap, liquidity trap equilibrium, Output gap, price Phillips curve, self-fulfilling liquidity trap, Tax on Inflation, Taxbased Incomes Policies, TIP rate, TIP rule, Zero Lower Bound
Policy implications and robustness
- An aggressive TIP rule (negative intercept, strong response to inflation) is robust to alternative ZLB origins (neutral rate decline versus self-fulfilling expectations).
- TIP can be an active policy tool to mitigate deflationary dynamics and correct output gaps when conventional monetary policy is constrained by the ZLB.
Source: IMF Working Paper "Tax on Inflation Policy at the Zero Lower Bound" by Damien Capelle and Yang Liu, March 27, 2026.
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