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The optimal inflation tax

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Author Info
Isabel Correia
Pedro Teles

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Abstract

We determine the second best rule for the inflation tax in monetary general equilibrium models where money is dominated in rate of return. The results in the literature are ambiguous and inconsistent across different monetary environments. We compare the derived optimal inflation tax solutions across the different environments and find that Friedman's policy recommendation of a zero nominal interest rate is the right one.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 123.

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Date of creation: 1997
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Handle: RePEc:fip:fedmem:123

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Keywords: Inflation (Finance) ; Taxation;

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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. McCallum, Bennett T., 1990. "Inflation: Theory and evidence," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 18, pages 963-1012 Elsevier. [Downloadable!] (restricted)
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  2. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359. [Downloadable!] (restricted)
  3. 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)
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  4. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October. [Downloadable!] (restricted)
  5. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  6. Calvo, Guillermo A & Guidotti, Pablo E, 1993. "On the Flexibility of Monetary Policy: The Case of the Optimal Inflation Tax," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 667-87, July. [Downloadable!] (restricted)
  7. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152 Elsevier. [Downloadable!] (restricted)
  8. 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)
  9. 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)
  10. Bennett T. McCallum, 1984. "The Role of Overlapping-Generations Models in Monetary Economics," NBER Working Papers 0989, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April. [Downloadable!] (restricted)
  12. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April. [Downloadable!] (restricted)
  13. 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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  14. Miguel Sidrauski, 1967. "Inflation and Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 75, pages 796. [Downloadable!] (restricted)
  15. 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!]
  16. Drazen, Allan, 1979. "The optimal rate of inflation revisited," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 231-248, April. [Downloadable!] (restricted)
  17. Siegel, Jeremy J., 1978. "Notes on optimal taxation and the optimal rate of inflation," Journal of Monetary Economics, Elsevier, vol. 4(2), pages 297-305, April. [Downloadable!] (restricted)
  18. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  19. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August. [Downloadable!] (restricted)
  20. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March. [Downloadable!] (restricted)
  21. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  22. Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco.
  23. Grandmont, Jean-Michel & Younes, Yves, 1973. "On the Efficiency of a Monetary Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 40(2), pages 149-65, April. [Downloadable!] (restricted)
  24. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Oxford University Press, vol. 18(2), pages 203-20, April.
  25. Chamley, Christophe, 1985. "On a simple rule for the optimal inflation rate in second best taxation," Journal of Public Economics, Elsevier, vol. 26(1), pages 35-50, February. [Downloadable!] (restricted)
  26. 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)
  27. Juan P. Nicolini, 1993. "More on the Time Inconsistency of Optimal Monetary Policy," Economics Working Papers 56, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  28. 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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