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The Optimal Mix Of Taxes on Money, Consumption and Income

  • Fiorella de Fiore
  • Pedro Teles

We show that the Friedman rule is optimal in the standard transactions techology monetary model whether the alternative fiscal instrument is a consumption tax, an income tax, or both, and whether taxes are paid with money or not. These results are at odds with recent literature. We show that an incorrect specification of the transactions technology explains the divergence.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w199902.

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Date of creation: 1999
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Handle: RePEc:ptu:wpaper:w199902
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  1. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimality of the Friedman rule in economies with distorting taxes," Staff Report 158, Federal Reserve Bank of Minneapolis.
  2. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
  3. Guidotti, Pablo E. & Vegh, Carlos A., 1993. "The optimal inflation tax when money reduces transactions costs : A reconsideration," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 189-205, April.
  4. Barro, Robert J, 1976. "Integral Constraints and Aggregation in an Inventory Model of Money Demand," Journal of Finance, American Finance Association, vol. 31(1), pages 77-88, March.
  5. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," Departmental Working Papers 200105, Rutgers University, Department of Economics.
  6. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2002. "Optimal fiscal and monetary policy: equivalence results," Working Paper Series WP-02-16, Federal Reserve Bank of Chicago.
  7. Mulligan, Casey B & Sala-i-Martin, Xavier, 1996. "Adoption of Financial Technologies: Implications for Money Demand and Monetary Policy," CEPR Discussion Papers 1358, C.E.P.R. Discussion Papers.
  8. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July.
  9. Guidotti, Pablo E., 1989. "Exchange rate determination, interest rates, and an integrative approach to the demand for money," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 29-45, March.
  10. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Casey B. Mulligan & Xavier Sala-i-Martin, 1997. "The optimum quantity of money: Theory and evidence," Economics Working Papers 229, Department of Economics and Business, Universitat Pompeu Fabra.
  12. Avinash Dixit, 1991. "The Optimal Mix of Inflationary Finance and Commodity Taxation with Collection Lags," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 643-654, September.
  13. De Fiore, Fiorella & Teles, Pedro, 2002. "The Optimal Mix of Taxes on Money, Consumption and Income," CEPR Discussion Papers 3437, C.E.P.R. Discussion Papers.
  14. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
  15. De Fiore, Fiorella, 2000. "Can indeterminacy explain the short-run non-neutrality of money?," Working Paper Series 0032, European Central Bank.
  16. Correia, Isabel & Teles, Pedro, 1996. "Is the Friedman rule optimal when money is an intermediate good?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 223-244, October.
  17. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
  18. R. Anton Braun, 1994. "Another attempt to quantify the benefits of reducing inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 17-25.
  19. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-77, June.
  20. Marshall, David A, 1992. " Inflation and Asset Returns in a Monetary Economy," Journal of Finance, American Finance Association, vol. 47(4), pages 1315-42, September.
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