What is the Role of the Transaction Cost of the Tax System in Stabilisation Policies?
) (Bank of Greece) Aspassia Strantzalou (Ministry of Employment and Social Protection, Greece) Abstract In the theory of monetary and fiscal policy interaction, the assumption of Ricardian households isolates the determinants of fiscal policy instrument from the price stabilization policies carried out by the central bank. One of the main implications of the above mentioned Ricardian assumption is that the fiscal policy does not have any distortionary effect for the economy, i.e. it does not affect the behaviour of the households, supporting that way the fiscal policy’s neutrality. The argument for this view comes if one assumes that fiscal policy has a distortionary effect on the behaviour of the agents. We relax the above non distortionary assumption by assuming that the imposition of the taxes is consistent with a transaction cost of the tax system that underlies the state – tax payer interaction. In this way we develop a channel through which the stability of prices carried out by
