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The Optimal Mix of Taxes on Money, Consumption and Income

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De Fiore, Fiorella
Teles, Pedro

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Abstract

We determine the optimal combination of taxes on money, consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes. We show that the optimal policy does not tax money, regardless of whether the government can use as alternative fiscal instruments an income tax, a consumption tax, or the two taxes jointly. These results are at odds with recent literature. We argue that the reason for this divergence is an inappropriate specification of the transactions technology adopted in the literature.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3437.

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Date of creation: Jun 2002
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Handle: RePEc:cpr:ceprdp:3437

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Related research
Keywords: friedman rule; inflation tax; 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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Correia, Maria Isabel Horta & Teles, Pedro, 1996. "Is the Friedman Rule Optimal When Money is an Intermediate Good?," CEPR Discussion Papers 1287, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Fiorella de Fiore, 2000. "Can indeterminacy explain the short-run non-neutrality of money?," Working Paper Series 32, European Central Bank. [Downloadable!]
  3. Marshall, David A, 1992. " Inflation and Asset Returns in a Monetary Economy," Journal of Finance, American Finance Association, vol. 47(4), pages 1315-42, September. [Downloadable!] (restricted)
  4. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-77, June. [Downloadable!] (restricted)
  5. De Fiore, Fiorella & Teles, Pedro, 2002. "The Optimal Mix of Taxes on Money, Consumption and Income," CEPR Discussion Papers 3437, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. 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. [Downloadable!] (restricted)
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  7. Martin Uribe & Stephanie Schmitt-Grohe, 2001. "Optimal fiscal and monetary policy under sticky prices," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
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  8. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2002. "Optimal fiscal and monetary policy: equivalence results," Working Paper Series WP-02-16, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  9. R. Anton Braun, 1994. "Another attempt to quantify the benefits of reducing inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 17-25. [Downloadable!]
  10. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Guidotti, Pablo E., 1989. "Exchange rate determination, interest rates, and an integrative approach to the demand for money," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 29-45, March. [Downloadable!] (restricted)
  12. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July. [Downloadable!] (restricted)
  13. Mulligan, Casey B & Sala-i-Martin, Xavier, 1996. "Adoption of Financial Technologies: Implications for Money Demand and Monetary Policy," CEPR Discussion Papers 1358, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April. [Downloadable!] (restricted)
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  15. Barro, Robert J, 1976. "Integral Constraints and Aggregation in an Inventory Model of Money Demand," Journal of Finance, American Finance Association, vol. 31(1), pages 77-88, March. [Downloadable!] (restricted)
  16. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alexandre B. Cunha, 2005. "The Optimality of the Friedman Rule When Some Distorting Taxes Are Exogenous," IBMEC RJ Economics Discussion Papers 2005-06, Economics Research Group, IBMEC Business School - Rio de Janeiro. [Downloadable!]
    Other versions:
  2. Lutz Kilian & Atsushi Inoue, 2003. "On the selection of forecasting models," Working Paper Series 214, European Central Bank. [Downloadable!]
    Other versions:
  3. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2002. "Optimal fiscal and monetary policy: equivalence results," Working Paper Series WP-02-16, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  4. Fiorella de Fiore, 2000. "Can indeterminacy explain the short-run non-neutrality of money?," Working Paper Series 32, European Central Bank. [Downloadable!]
  5. Cornelia Holthausen & Jean-Charles Rochet, 2002. "Efficient pricing of large value interbank payment systems," Working Paper Series 184, European Central Bank. [Downloadable!]
    Other versions:
  6. Lippi, Francesco & Secchi, Alessandro, 2006. "Technological change and the demand for currency: An analysis with household data," CEPR Discussion Papers 6023, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Alexandre Cunha, 2004. "The Friedman Rule in a Two Sector Small Open Economy," Econometric Society 2004 North American Summer Meetings 530, Econometric Society. [Downloadable!]
  8. Fiorella de Fiore, 2000. "The optimal inflation tax when taxes are costly to collect," Working Paper Series 38, European Central Bank. [Downloadable!]
  9. Carsten Detken & Alistair Dieppe & Jerome Henry & Frank Smets & Carmen Marin, 2002. "Model uncertainty and the equilibrium value of the real effective euro exchange rate," Working Paper Series 160, European Central Bank. [Downloadable!]
  10. Nicole Jonker, 2002. "Constructing quality-adjusted price indices: a comparison of hedonic and discrete choice models," Working Paper Series 172, European Central Bank. [Downloadable!]
    Other versions:
  11. Giancarlo Corsetti & Luca Dedola, 2002. "From the ERM to the Euro: new evidence on economic and policy convergence among EU countries," Working Paper Series 176, European Central Bank. [Downloadable!]
    Other versions:
  12. Fiorella de Fiore & Pedro Teles, 2002. "The optimal mix of taxes on money, consumption and income," Working Paper Series 135, European Central Bank. [Downloadable!]
    Other versions:
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