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Inflation Taxation and Welfare with Externalities and Leisure

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  • WAI-MING HO
  • JINLI ZENG
  • JIE ZHANG

Abstract

This paper examines how inflation taxation affects resource allocation and welfare in a neoclassical growth model with leisure, a production externality and money in the utility function. Switching from consumption taxation to inflation taxation to finance government spending reduces real money balances relative to income, but increases consumption, labor, capital, and output. The net welfare effect of this switch depends crucially on the strength of the externality and on the elasticity of intertemporal substitution. While it is always negative without the externality, it is likely to be positive with a strong externality and elastic intertemporal substitution. Copyright 2007 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.0022-2879.2007.00005.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 1 (02)
Pages: 105-131

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:1:p:105-131

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Ching-chong Lai & Chi-ting Chin, 2010. "(In)determinacy, increasing returns, and the optimality of the Friedman rule in an endogenously growing open economy," Economic Theory, Springer, vol. 44(1), pages 69-100, July.
  2. Chu, Angus C. & Lai, Ching-Chong & Liao, Chih-Hsing, 2010. "A tale of two growth engines: The interactive effects of monetary policy and intellectual property rights," MPRA Paper 30105, University Library of Munich, Germany, revised Apr 2011.
  3. Lu, Chia-Hui & Chen, Been-Lon & Hsu, Mei, 2011. "The dynamic welfare cost of seignorage tax and consumption tax in a neoclassical growth model with a cash-in-advance constraint," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 247-258, June.

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