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On the Use of the Inflation Tax when Non-Distortionary Taxes Are Available

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  • Bhattacharya, Joydeep
  • Haslag, Joseph

Abstract

Using a pure-exchange overlapping generations model in which money is valued because of a 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.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 5247.

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Date of creation: 01 Oct 2001
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Publication status: Published in Review of Economic Dynamics, October 2001, vol. 4 no. 4, pp. 823-841
Handle: RePEc:isu:genres:5247

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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References

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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, vol. 29(4), pages 687-715, November.
  2. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March.
  3. Click, Reid W, 1998. "Seigniorage in a Cross-Section of Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 154-71, May.
  4. Bhattacharya, Joydeep & Haslag, Joseph, 2001. "On the Use of the Inflation Tax when Non-Distortionary Taxes Are Available," Staff General Research Papers 5247, Iowa State University, Department of Economics.
  5. 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.
  6. Isabel Correia & Pedro Teles, 1997. "The optimal inflation tax," Discussion Paper / Institute for Empirical Macroeconomics 123, Federal Reserve Bank of Minneapolis.
  7. 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, vol. 37(2-3), pages 203-223, April.
  8. Helpman, Elhanan & Sadka, Efraim, 1979. "Optimal Financing of the Government's Budget: Taxes, Bonds, or Money?," American Economic Review, American Economic Association, vol. 69(1), pages 152-60, March.
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Citations

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Cited by:
  1. 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, vol. 4(4), pages 823-841, October.
  2. Rangan Gupta, 2005. "Costly State Monitoring and Reserve Requirements," Annals of Economics and Finance, Society for AEF, vol. 6(2), pages 263-288, November.
  3. Puhakka, Mikko, 2004. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Research Discussion Papers 29/2004, Bank of Finland.
  4. Rangan Gupta, 2005. "Tax Evasion and Financial Repression," Working papers 2005-34, University of Connecticut, Department of Economics, revised Jun 2007.
  5. Rangan Gupta, 2005. "A Generic Model of Financial Repression," Working papers 2005-20, University of Connecticut, Department of Economics, revised Jul 2005.
  6. Joe Haslag & Joydeep Bhattacharya & Steven Russell, 2003. "Understanding the Roles of Money, or When is the Friedman Rule Optimal, and Why?," Working Papers 0301, Department of Economics, University of Missouri.
  7. Mikko Puhakka, 2005. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Macroeconomics 0508033, EconWPA.
  8. Joydeep Bhattacharya & Helle Bunzel & Joseph Haslag, 2005. "The non-monotonic relationship between seigniorage and inequality," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 500-519, May.
  9. 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 11950, Iowa State University, Department of Economics.
  10. Rangan Gupta, 2005. "Endogenous Tax Evasion and Reserve Requirements: A Comparative Study in the Context of European Economies," Computing in Economics and Finance 2005 328, Society for Computational Economics.

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