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Dynamic Taxation, Private Information and Money

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  • University of Notre Dame
  • Christopher Waller

Abstract

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 search market. Money is essential in this market. Since preference shocks are private information, in a record-keeping economy without money, the planner's allocation trades off efficient risk sharing against production efficiency in the search market and average consumption when old. For a government to replicate this outcome in a monetary economy without record-keeping, distortionary taxation of money balances is needed if other taxes are constrained to be lump-sum and/or linear.

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  • University of Notre Dame & Christopher Waller, 2008. "Dynamic Taxation, Private Information and Money," 2008 Meeting Papers 896, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:896
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    References listed on IDEAS

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    Cited by:

    1. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96 Elsevier.
    2. Guillaume Rocheteau, 2008. "Money and competing assets under private information," Working Paper 0802, Federal Reserve Bank of Cleveland.
    3. David Andolfatto, 2007. "Incentives and the Limits to Deflationary Policy," Discussion Papers dp07-14, Department of Economics, Simon Fraser University.
    4. Dong, Mei & Jiang, Janet Hua, 2010. "One or two monies?," Journal of Monetary Economics, Elsevier, pages 439-450.
    5. Dong, Mei & Jiang, Janet Hua, 2010. "One or two monies?," Journal of Monetary Economics, Elsevier, pages 439-450.
    6. Nicolas L. Jacquet & Serene Tan, 2011. "Money, Bargaining, and Risk Sharing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 419-442, October.
    7. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Paper 0901, Federal Reserve Bank of Cleveland.
    8. Joseph H. Haslag & Joydeep Bhattacharya & Antoine Martin, 2007. "Money, output and the payment system: Optimal monetary policy in a model with hidden effort," Working Papers 0704, Department of Economics, University of Missouri.

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