Monetary and Financial Tax Interventions in Liquidity Traps

We characterize the joint optimal conduct of unconventional monetary and financial tax policies in a New Keynesian model wherein endogenous supply-side financial frictions generate inflationary credit spreads. Cost-push borrowing costs and private asset taxes substantially alter the transmission of optimal monetary policy under both discretion and commitment. State-contingent asset tax regimes remove the zero lower bound restriction on the nominal policy rate, thus minimizing output and price fluctuations following both supply-driven and demand-driven liquidity traps. Discretionary and commitment policies with financial taxation deliver virtually equivalent welfare gains, and invalidate calls for time-inconsistent forward guidance strategies