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Dynamic taxation, private information and money

  • Christopher J. Waller

The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In middle age, agents receive preference shocks and trade amongst themselves in an anonymous manner. Since preference shocks are private information, in a record-keeping economy, the planner's constrained allocation trades off efficient risk sharing against production efficiency in the search market. In the absence of record-keeping, the government uses flat money as a substitute for dynamic contracts to induce truthful revelation of preferences. Inflation affects agents' incentive constraints and so distortionary taxation of money may be needed as part of the optimal policy even if lump-sum taxes are available.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-035.

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Date of creation: 2009
Date of revision:
Handle: RePEc:fip:fedlwp:2009-035
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  1. Mikhail Golosov & Narayana R. Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Working Papers 615, Federal Reserve Bank of Minneapolis.
  2. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
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  4. Pedro Gomis-Porqueras & Adrian Peralta-Alva, 2008. "Optimal monetary and fiscal policies in a search theoretic model of monetary exchange," Working Papers 2008-015, Federal Reserve Bank of St. Louis.
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  7. S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money and dynamic credit arrangements with private information," Working Paper 9807, Federal Reserve Bank of Cleveland.
  8. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
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  11. Aruoba, S. Boragan & Chugh, Sanjay K., 2010. "Optimal fiscal and monetary policy when money is essential," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1618-1647, September.
  12. Zhu, Tao, 2008. "An overlapping-generations model with search," Journal of Economic Theory, Elsevier, vol. 142(1), pages 318-331, September.
  13. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
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  15. Wallace, Neil, 2001. "Whither Monetary Economics?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 847-69, November.
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  17. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
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