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Is the Friedman Rule Optimal When Money is an Intermediate Good?

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Author Info
Correia, Maria Isabel Horta
Teles, Pedro

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Abstract

In contrast to the recent literature on the optimal inflation tax, we show that, in models where money reduces transactions costs, it is optimal to set the inflation tax to zero when seigniorage is replaced by revenue from distortionary taxes. The main reasons for this result are that the variable costs of supplying real balances are negligible and the inflation tax is a unit tax. We also show that the intermediate good optimal taxation rules, in the public finance literature, cannot be directly applied both when money is costless and when it requires resources to be produced.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1287.

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Date of creation: Feb 1996
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Handle: RePEc:cpr:ceprdp:1287

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Related research
Keywords: Friedman Rule Inflation Tax Intermediate Good Transactions Technology

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. Recursive Macroeconomic Theory
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