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Money Illusion and the Double Dividend in the Short Run

Author

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  • Reto Schleiniger

Abstract

In their seminal paper, Bovenberg and De Mooij (1994) elucidate why an ecological tax reform will not yield a double dividend, i.e. fails to increase the efficiency of the tax system. The present paper slightly modifies the Bovenberg and De Mooij model by introducing money illusion. With this modification, an environmental tax reform that raises the price level may generate a double dividend, since the additional tax on the dirty good does not reduce labor supply. A prerequisite for the double dividend to occur is a sufficiently small elasticity of substitution between clean and dirty consumption. Moreover, accounting for money illusion always reduces the intertemporal gross cost of the tax reform.

Suggested Citation

  • Reto Schleiniger, "undated". "Money Illusion and the Double Dividend in the Short Run," IEW - Working Papers 093, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:093
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    File URL: https://www.econ.uzh.ch/apps/workingpapers/wp/iewwp093.pdf
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    Cited by:

    1. Tobias Kronenberg, 2010. "Energy conservation, unemployment and the direction of technical change," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 9(1), pages 1-17, April.

    More about this item

    Keywords

    Environmental tax reform; money illusion; double dividend;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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