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

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  • Gahvari, Firouz

    (Department of Economics, University of Illinois)

  • Micheletto, Luca

    (Uppsala Center for Fiscal Studies)

Abstract

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.

Suggested Citation

  • Gahvari, Firouz & Micheletto, Luca, 2012. "Monetary policy and redistribution: What can or cannot be neutralized with Mirrleesian taxes," Working Paper Series, Center for Fiscal Studies 2012:5, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uufswp:2012_005
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    References listed on IDEAS

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    Cited by:

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    3. Erotokritos Varelas & Gerasimos T. Soldatos, 2014. "The Chicago Tradition and Commercial Bank Seigniorage," Research in World Economy, Research in World Economy, Sciedu Press, vol. 5(1), pages 29-38, March.
    4. Soldatos, Gerasimos T., 2014. "Local Taxation, Private-Public Consumption Complementarity, and the Optimal Number of Jurisdictions," MPRA Paper 60861, University Library of Munich, Germany.

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    More about this item

    Keywords

    Monetary policy; scal policy; redistribution; Friedman rule; heterogeneity; overlapping generations; second best 1;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education

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