Scandinavian Working Papers in Economics
Working Paper Series, Center for Fiscal Studies,
Uppsala University, Department of Economics
No 2012:5: Monetary policy and redistribution: What can or cannot be neutralized with Mirrleesian taxes
Firouz Gahvari () and Luca Micheletto ()
Additional contact information
Firouz Gahvari: Department of Economics, University of Illinois, Postal: Urbana-Champaign, USA
Luca Micheletto: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
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.
Keywords: Monetary policy; scal policy; redistribution; Friedman rule; heterogeneity; overlapping generations; second best 1
39 pages, January 25, 2012
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