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Inflation and Taxation with Optimizing Governments

  • Poterba, James M
  • Rotemberg, Julio J

This paper examines the empirical validity of the predictions that if governments minimize the deadweight loss from raising revenue through inflation and tax finance, there should be a positive contemporaneous association between inflation and the level of tax burdens. The authors examine the empirical validity of this prediction using data from Great Britain, France, Germany, Japan, and the United States. Inflation and tax rates are as likely to be negatively as positively correlated, so the results cast doubt on the empirical relevance of simple models in which governments with time-invariant tastes choose monetary policy to equate the marginal deadweight burdens of inflation and taxes. Copyright 1990 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 22 (1990)
Issue (Month): 1 (February)
Pages: 1-18

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Handle: RePEc:mcb:jmoncb:v:22:y:1990:i:1:p:1-18
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  1. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  2. Martin Feldstein, 1983. "Inflation, Tax Rules, and Capital Formation," NBER Books, National Bureau of Economic Research, Inc, number feld83-1, September.
  3. Barro, Robert J & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," The Journal of Business, University of Chicago Press, vol. 59(4), pages 555-66, October.
  4. 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.
  5. Drazen, Allan, 1979. "The optimal rate of inflation revisited," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 231-248, April.
  6. Alberto Alesina & Jeffrey Sachs, 1986. "Political Parties and the Business Cycle in the United States, 1948-1984," NBER Working Papers 1940, National Bureau of Economic Research, Inc.
  7. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
  8. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  9. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  10. Sachs, Jeffrey & Alesina, Alberto, 1988. "Political Parties and the Business Cycle in the United States, 1948-1984," Scholarly Articles 4553026, Harvard University Department of Economics.
  11. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-30, October.
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