Inflation Aversion and the Optimal Inflation Tax

Gaowang Wang and Heng-Fu Zou ()

No 480, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: The optimal inflation tax is reexamined in the framework of dynamic second best economy populated by individuals with inflation aversion. A simple formula for the optimal inflation rate is derived. Different from the literature, it is shown that if the marginal excess burden of other distorting taxes approaches zero, Friedman's rule for optimum quantity of money is not optimal, and the optimal inflation tax is negative; if the marginal excess burden of other taxes is nonzero, the optimal inflation rate is indeterminate and relies on the tradeoffs between the impatience effect of inflation and the effects of other economic forces in the monetary economy.

Keywords: Inflation aversion; Optimal inflation tax; Second best taxation; The friedman rule (search for similar items in EconPapers)
JEL-codes: E31 E41 E52 H21 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2011
New Economics Papers: this item is included in nep-acc, nep-cba, nep-mac, nep-mon and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Annals of Economics and Finance, May 2011, pages 13-30

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Journal Article: Inflation Aversion and the Optimal Inflation Tax (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:480

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