Tax on Inflation Policy at the Zero Lower Bound

This paper evaluates the effectiveness and robustness of a Tax on Inflation Policy (TIP) for improving welfare at the Zero Lower Bound (ZLB) in a New Keynesian model. When the ZLB results from a fall in the neutral interest rate, a negative TIP mitigates deflationary pressures, narrows the output gap, and 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 a medium-scale model calibrated to Japan, we quantify a robust TIP rule that would have lifted the economy out of its liquidity trap.