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
Full text files
FULLTEXT01.pdf
Questions (including download problems) about the papers in this series should be directed to Katarina Grönvall ()
Report other problems with accessing this service to Sune Karlsson ().
RePEc:hhs:uufswp:2012_005This page generated on 2024-09-13 22:17:28.