The Inflation Tax in an Open Economy with Imperfect Competition

David M. Arseneau

Review of Economic Dynamics, 2007, vol. 10, issue 1, pages 126-147

Abstract: This paper studies the national welfare maximizing inflation tax in an open economy with imperfect competition. It shows that the presence of a monopolistic distortion dampens the incentive to engage in strategic use of the inflation tax. If this dampening effect is strong enough, monetary policy becomes completely inward-looking, restoring the Friedman rule as an equilibrium strategy regardless of the actions of the foreign government. This aspect of the policy interaction -- driven entirely by the presence of imperfect competition -- is important because it determines the underlying structure of the policy game and is therefore crucial for determining whether or not there exist welfare gains from international monetary cooperation. (Copyright: Elsevier)

Keywords: Optimal monetary policy; Imperfect competition; Friedman rule; International monetary policy coordination (search for similar items in EconPapers)
JEL-codes: E58 E61 F41 F42 (search for similar items in EconPapers)
Date: 2007
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