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Optimal Taxation by the Monetary Authority

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  • Carl E. Walsh

Abstract

Reserve requirements imposed against bank deposits, nominal interest payments on bank reserves (or on base money), and inflation can all be viewed as generating tax effects. Any analysis of optimal monetary policy in a steady-state equilibrium needs to consider the simultaneous choice of all the tax instruments controlled by the monetary authority. Such an analysis is carried out in this paper. It is shown that when the tax system is not indexed, the optimal nominal interest rate on the monetary authority's liabilities is likely to be zero. More importantly, any discussion of the payment of interest on reserves and currency must take into account the nature of the tax system and the rate of inflation in a nonindexed economy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1375.

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Date of creation: Jun 1984
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Handle: RePEc:nbr:nberwo:1375

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  1. Sandmo, Agnar, 1976. "Optimal taxation : An introduction to the literature," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 37-54.
  2. Harry G. Johnson, 1968. "Problems of Efficiency in Monetary Management," Journal of Political Economy, University of Chicago Press, vol. 76, pages 971.
  3. Summers, Lawrence H., 1981. "Optimal inflation policy," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 175-194.
  4. Clower, Robert W, 1970. "Is There an Optimal Money Supply?," Journal of Finance, American Finance Association, vol. 25(2), pages 425-33, May.
  5. Johnson, Harry G, 1970. "Is There an Optimal Money Supply?," Journal of Finance, American Finance Association, vol. 25(2), pages 435-42, May.
  6. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  7. 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.
  8. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  9. Brunner, Karl & Meltzer, Allan H., 1983. "Money, monetary policy, and financial institutions," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 18(1), pages 1-7, January.
  10. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-40, September.
  11. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-76, April.
  12. Drazen, Allan, 1979. "The optimal rate of inflation revisited," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 231-248, April.
  13. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-83, June.
  14. 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.
  15. Bennett T. McCallum, 1982. "The Role of Overlapping-Generations Models in Monetary Economics," NBER Working Papers 0989, National Bureau of Economic Research, Inc.
  16. Green, Jerry & Sheshinski, Eytan, 1977. "Budget Displacement Effects of Inflationary Finance," American Economic Review, American Economic Association, vol. 67(4), pages 671-82, September.
  17. Marty, Alvin L, 1978. "Inflation, Taxes, and the Public Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(4), pages 437-52, November.
  18. Deaton, Angus, 1979. "The Distance Function in Consumer Behaviour with Applications to Index Numbers and Optimal Taxation," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 391-405, July.
  19. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  20. Benhabib, Jess & Bull, Clive, 1983. "The Optimal Quantity of Money: A Formal Treatment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 101-11, February.
  21. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
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Cited by:
  1. Easterly, William & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1992. "Money demand and seignorage - maximizing inflation," Policy Research Working Paper Series 1049, The World Bank.
  2. Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
  3. Ryu‐ichiro Murota & Yoshiyasu Ono, 2012. "Zero Nominal Interest Rates, Unemployment, Excess Reserves And Deflation In A Liquidity Trap," Metroeconomica, Wiley Blackwell, vol. 63(2), pages 335-357, 05.
  4. Gustavo Suárez, 1999. "Tecnología De Transacciones Endógena Y Los Costos De La Inflación," BORRADORES DE ECONOMIA 003545, BANCO DE LA REPÚBLICA.

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