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Monetary policy and redistribution: What can or cannot be neutralized with Mirrleesian taxes

  • Gahvari, Firouz

    ()

    (Department of Economics, University of Illinois)

  • Micheletto, Luca

    ()

    (Uppsala Center for Fiscal Studies)

This paper develops an overlapping-generations model with heterogeneous agents in terms of earning ability and cash-in-advance constraint. It shows that tax pol- icy cannot fully replicate or neutralize the redistributive implications of monetary policy. While who gets the extra money becomes irrelevant, the rate of growth of money supply keeps its bite. A second lesson is that the Friedman rule is not in general optimal. The results are due to the existence of another source of het- erogeneity among individuals besides di erences in earning ability that underlies the Mirrleesian approach to optimal taxation. They hold even in the presence of a general income tax and preferences that are separable in labor supply and goods. If di erences in earning ability were the only source of heterogeneity, the scal au- thority would be able to neutralize the e ects of a change in the rate of monetary growth and a version of the Friedman rule becomes optimal.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2012:5.

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Length: 39 pages
Date of creation: 25 Jan 2012
Date of revision:
Handle: RePEc:hhs:uufswp:2012_005
Contact details of provider: Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
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