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The Inflation Tax in an Open Economy with Imperfect Competition

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  • David Arseneau

    (Federal Reserve Board of Governors)

Abstract

This paper studies the national welfare maximizing inflation tax in an open economy with imperfect competition. It shows that the presence of a monopolistic distortion dampens the incentive to engage in strategic use of the inflation tax. If this dampening effect is strong enough, monetary policy becomes completely inward-looking, restoring the Friedman rule as an equilibrium strategy regardless of the actions of the foreign government. This aspect of the policy interaction -- driven entirely by the presence of imperfect competition -- is important because it determines the underlying structure of the policy game and is therefore crucial for determining whether or not there exist welfare gains from international monetary cooperation. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.08.004
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 1 (January)
Pages: 126-147

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Handle: RePEc:red:issued:05-75

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Related research

Keywords: Optimal monetary policy; Imperfect competition; Friedman rule; International monetary policy coordination;

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References

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  1. Obstfeld, Maurice & Rogoff, Kenneth, 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt5pf7g8sh, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 203-223, April.
  3. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  4. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 249-83, April.
  5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  6. Russell Cooper & Hubert Kempf, 2003. "Commitment and the Adoption of a Common Currency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 119-142, February.
  7. Robert E. Hall, 1986. "Market Structure and Macroeconomic Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 285-338.
  8. Benigno, Pierpaolo, 2002. "A simple approach to international monetary policy coordination," Journal of International Economics, Elsevier, Elsevier, vol. 57(1), pages 177-196, June.
  9. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(2), pages 421-445, May.
  10. Thomas F. Cooley & Vincenzo Quadrini, 2003. "Common Currencies vs. Monetary Independence," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 785-806.
  11. Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(1), pages 87-108, November.
  12. Kenneth L. Judd, 2002. "Capital-Income Taxation with Imperfect Competition," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 417-421, May.
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Citations

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Cited by:
  1. David Arseneau, 2012. "Expectation traps in a new Keynesian open economy model," Economic Theory, Springer, Springer, vol. 49(1), pages 81-112, January.
  2. Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2013. "Monetary Policy, R&D and Economic Growth in an Open Economy," MPRA Paper 47364, University Library of Munich, Germany.
  3. Carlos Esteban Posada P. & Camilo Morales J., . "Inflación y apertura: evidencia para Colombia (1980-2005)," Borradores de Economia 460, Banco de la Republica de Colombia.
  4. Evans, Richard W., 2012. "Is openness inflationary? Policy commitment and imperfect competition," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(4), pages 1095-1110.
  5. Richard W. Evans, 2007. "Is openness inflationary? Imperfect competition and monetary market power," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 01, Federal Reserve Bank of Dallas.
  6. Michael Evers, 2007. "Optimal Monetary Policy in an Interdependent World," Bonn Econ Discussion Papers, University of Bonn, Germany bgse10_2007, University of Bonn, Germany.
  7. Arbex, Marcelo & Turdaliev, Nurlan, 2011. "Optimal monetary and audit policy with imperfect taxation," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(2), pages 327-340, June.
  8. 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, Springer, vol. 44(1), pages 69-100, July.
  9. Dudley Cooke, 2012. "Optimal monetary policy in a two country model with firm-level heterogeneity," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 104, Federal Reserve Bank of Dallas.
  10. Michael P. Evers, 2007. "Optimum Policy Domains in an Interdependent World," Bonn Econ Discussion Papers, University of Bonn, Germany bgse12_2007, University of Bonn, Germany.

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