ABSTRACT This paper analyzes narratively identified statutory tax reforms in the US and shows that the average impact of monetary policy on employment varies depending on the tax treatment firms receive. Specifically, monetary policy has a greater impact on employment when firms face tax increases, relative to the times when firms face stable taxes. Moreover, monetary policy is least effective on employment when firms face marginal tax cuts. The evidence is consistent with the debt tax shield channel and is most pronounced in the employment responses of firms with high leverage.
Ezgi Kurt (Mon,) studied this question.