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On the Use of the Inflation Tax When Nondistortionary Taxes Are Available

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  • Joydeep Bhattacharya

    (Iowa State University)

  • Joseph H. Haslag

    (University of Missouri Columbia)

Abstract

Using a pure-exchange overlapping generations model in which money is valued because of legal restriction, we show the following: (a) a benevolent government may make some use of the inflation tax in conjunction with a lump-sum tax on the young, but not if lump-sum taxes on the old are available, and (b) the welfare-maximizing monetary policy may deviate from the Friedman rule (contract the money supply so as to equate the real return on money and other competing stores of value) in either case. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.2001.0135
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 4 (2001)
Issue (Month): 4 (October)
Pages: 823-841

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Handle: RePEc:red:issued:v:4:y:2001:i:4:p:823-841

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  1. Mulligan, Casey B & Sala-I-Martin, Xavier X, 1997. "The Optimum Quantity of Money: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(4), pages 687-715, November.
  2. Click, Reid W, 1998. "Seigniorage in a Cross-Section of Countries," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(2), pages 154-71, May.
  3. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, Elsevier, vol. 19(2), pages 307-314, March.
  4. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimality of the Friedman Rule in Economies with Distorting Taxes," NBER Working Papers 4443, National Bureau of Economic Research, Inc.
  5. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
  6. Helpman, Elhanan & Sadka, Efraim, 1979. "Optimal Financing of the Government's Budget: Taxes, Bonds, or Money?," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 152-60, March.
  7. Bhattacharya, Joydeep & Haslag, Joseph, 2001. "On the Use of the Inflation Tax when Non-Distortionary Taxes Are Available," Staff General Research Papers, Iowa State University, Department of Economics 5247, Iowa State University, Department of Economics.
  8. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152 Elsevier.
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Cited by:
  1. Rangan Gupta, 2004. "Costly State Monitoring and Reserve Requirements," Working papers, University of Connecticut, Department of Economics 2004-33, University of Connecticut, Department of Economics, revised Jul 2005.
  2. Joydeep Bhattacharya & Helle Bunzel & Joseph Haslag, 2005. "The non-monotonic relationship between seigniorage and inequality," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 38(2), pages 500-519, May.
  3. Rangan Gupta, 2005. "Tax Evasion and Financial Repression," Working papers, University of Connecticut, Department of Economics 2005-34, University of Connecticut, Department of Economics, revised Jun 2007.
  4. Rangan Gupta, 2005. "A Generic Model of Financial Repression," Working papers, University of Connecticut, Department of Economics 2005-20, University of Connecticut, Department of Economics, revised Jul 2005.
  5. Joydeep Bhattacharya & Joseph H. Haslag, 2001. "On the Use of the Inflation Tax When Nondistortionary Taxes Are Available," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 823-841, October.
  6. Puhakka, Mikko, 2004. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Research Discussion Papers, Bank of Finland 29/2004, Bank of Finland.
  7. Joe Haslag & Joydeep Bhattacharya & Steven Russell, 2003. "Understanding the Roles of Money, or When is the Friedman Rule Optimal, and Why?," Working Papers, Department of Economics, University of Missouri 0301, Department of Economics, University of Missouri.
  8. Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2004. "The Role of Money in Two Alternative Models: When is the Friedman Rule Optimal, and Why?," Staff General Research Papers, Iowa State University, Department of Economics 11950, Iowa State University, Department of Economics.
  9. Rangan Gupta, 2005. "Endogenous Tax Evasion and Reserve Requirements: A Comparative Study in the Context of European Economies," Computing in Economics and Finance 2005, Society for Computational Economics 328, Society for Computational Economics.
  10. Mikko Puhakka, 2005. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Macroeconomics, EconWPA 0508033, EconWPA.

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