IDEAS home Printed from https://ideas.repec.org/p/bku/doctra/2000007.html
   My bibliography  Save this paper

Optimal taxation and debt composition: Is Monetary Policy Too Costly?

Author

Listed:
  • Gerardo Licandro

    (Banco Central del Uruguay)

Abstract

Using an optimal taxation model, in which inflation and inflation variability are tied together, we are able to determine that the incentives to generate inflationary surprise backfire, increasing the cost of debt. When we require plans to be time consistent, we find that, although the policymaker would rather set inflation to international standards, this target is not part of any time consistent equilibrium. In order to achieve the Pareto-improving zero-inflation outcome the government needs to resort to commitment mechanisms. It is shown that an optimal selection of the debt-portfolio results in better outcomes by reducing the base of the inflation tax, but some inflationary bias persists as long as the national currency exists. With a debt portfolio in which nominal debt is incorporated, in order to achieve the zero-inflation Stackelberg equilibrium the country needs to commit to zero inflation.

Suggested Citation

  • Gerardo Licandro, 2000. "Optimal taxation and debt composition: Is Monetary Policy Too Costly?," Documentos de trabajo 2000007, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2000007
    as

    Download full text from publisher

    File URL: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/7.2000.pdf
    File Function: First draft, 2000
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330, National Bureau of Economic Research, Inc.
    2. Missale, Alessandro, 1997. "Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-265, September.
    3. Gerardo Licandro, 2000. "Is Mercosur an Optimal Currency Area? A shock correlation perspective," Documentos de trabajo 2000004, Banco Central del Uruguay.
    4. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
    5. Marcello de Cecco & Lorenzo Pecchi & Gustavo Piga (ed.), 1997. "Managing Public Debt," Books, Edward Elgar Publishing, number 1172, December.
    6. Grier, Kevin B. & Perry, Mark J., 1996. "Inflation, inflation uncertainty, and relative price dispersion: Evidence from bivariate GARCH-M models," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 391-405, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alessandro MISSALE & Emanuele BACCHIOCCHI, 2005. "Managing debt stability," Departmental Working Papers 2005-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    2. Peters, David W., 2007. "The behavior of government of Canada real return bond returns," International Review of Financial Analysis, Elsevier, vol. 16(2), pages 152-171.
    3. Ghada Abbas, 2006. "Gestion de la dette publique et lissage des taux d’imposition," CAE Working Papers 46, Aix-Marseille Université, CERGAM.
    4. Johannes Holler, 2013. "Funding Strategies of Sovereign Debt Management: A Risk Focus," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 51-74.
    5. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Occasional Papers 0705, Banco de España.
    6. Paniagua, Jordi & Sapena, Juan & Tamarit, Cecilio, 2017. "Fiscal sustainability in EMU countries: A continued fiscal commitment?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 85-97.
    7. Alessandro Missale & Francesco Giavazzi & Pierpaolo Benigno, "undated". "Managing the Public Debt in Fiscal Stabilizations: the Evidence," Working Papers 118, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    8. Gerardo M Licandro, 2001. "Monetary Policy Coordination, Monetary Integration and other essays," Levine's Working Paper Archive 625018000000000172, David K. Levine.
    9. Bank for International Settlements, 2011. "Interactions of sovereign debt management with monetary conditions and financial stability," CGFS Papers, Bank for International Settlements, number 42, december.
    10. Alessandro Missale, 2012. "Sovereign debt management and fiscal vulnerabilities," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 157-176, Bank for International Settlements.
    11. de Mendonça, Helder Ferreira & Tiberto, Bruno Pires, 2014. "Public debt and social security: Level of formality matters," Economic Modelling, Elsevier, vol. 42(C), pages 490-507.
    12. Ghironi, Fabio & Hernandez, Kolver, 2004. "Comments on "Monetary policy rules and exchange rate flexibility in a simple dynamic general equilibrium model"," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 309-313, June.
    13. Ed Westerhout & Ona Ciocyte, 2017. "The role of inflation-linked bonds," CPB Discussion Paper 344, CPB Netherlands Bureau for Economic Policy Analysis.
    14. Pintér, Gábor, 2022. "The procyclicality of inflation-linked debt," Economics Letters, Elsevier, vol. 218(C).
    15. Stephen McKnight & Marco Robles Sánchez, 2014. "Is a monetary union feasible for Latin America? Evidence from real effective exchange rates and interest rate pass-through levels," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 29(2), pages 225-262.
    16. Marcel Fratzscher & Arnaud Mehl, 2014. "China's Dominance Hypothesis and the Emergence of a Tri‐polar Global Currency System," Economic Journal, Royal Economic Society, vol. 124(581), pages 1343-1370, December.
    17. Samir Jahjah & Bin Wei & Vivian Zhanwei Yue, 2013. "Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(7), pages 1275-1300, October.
    18. repec:got:cegedp:84 is not listed on IDEAS
    19. Assaf Razin & Efraim Sadka, 1996. "Fiscal Balance During Inflation, Disinflation, and Immigration: Policy Lessons," IMF Working Papers 1996/033, International Monetary Fund.
    20. Martin Melecky, 2012. "Choosing The Currency Structure Of Foreign‐Currency Debt: A Review Of Policy Approaches," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(2), pages 133-151, March.
    21. Abdelraouf, Nadine & Noureldin, Diaa, 2022. "The impact of the exchange rate regime on the dispersion of the price-change distribution: Evidence from a large panel of countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bku:doctra:2000007. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Biblioteca Especializada (email available below). General contact details of provider: https://edirc.repec.org/data/bcugvuy.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.