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Monetary Policy, Fiscal Policy, And The Inflation Tax: Equivalence Results

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  • BHATTACHARYA, JOYDEEP
  • HASLAG, JOSEPH H.
  • RUSSELL, STEVEN

Abstract

This paper clarifies and extends previous work on the equivalence between monetary regimes and fiscal regimes involving social security systems. We show that monetary regimes of the type we study are equivalent to two alternative types of social security regimes. This result has an important implication. Notably, governments can finance a real expenditure by increasing the inflation rate, or finance the expenditure by increasing the tax rate on social security benefits. Such equivalence should help us better understand the role that monetary policy plays in these economies.This research was begun while Russell was visiting Iowa State University. We gratefully acknowledge helpful conversations with Scott Freeman and Peter Rangazas, and comments from participants at the Midwest Macroeconomics Meetings in Atlanta. The views expressed herein do not necessarily represent the views of the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Kansas City.

Suggested Citation

  • Bhattacharya, Joydeep & Haslag, Joseph H. & Russell, Steven, 2003. "Monetary Policy, Fiscal Policy, And The Inflation Tax: Equivalence Results," Macroeconomic Dynamics, Cambridge University Press, vol. 7(5), pages 647-669, November.
    • Handle: RePEc:cup:macdyn:v:7:y:2003:i:05:p:647-669_02
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    Cited by:

    1. Arbex, Marcelo & Turdaliev, Nurlan, 2011. "Optimal monetary and audit policy with imperfect taxation," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 327-340, June.
    2. Ho Wai-Ming, 2020. "Liquidity constraints, international trade, and optimal monetary policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(2), pages 1-29, June.
    3. Gahvari, Firouz, 2007. "The Friedman rule: Old and new," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 581-589, March.
    4. Kang, Minwook & Kim, Eungsik, 2023. "A government policy with time-inconsistent consumers," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 44-67.

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