Optimal Fiscal and Monetary Policy with Distorting Taxes

Christopher A. Sims

American Economic Journal: Macroeconomics, 2025, vol. 17, issue 2, 1-23

Abstract: When government debt pays a lower return than private assets, the reasoning in Friedman's (1969) essay on the optimal quantity of money suggests that it would be optimal to expand the debt until its return matched that on private assets. When the only other source of revenue is a distorting tax, however, this is not generally true. In a perfect foresight model, a benevolent government that can make credible commitments chooses a large gap in returns initially and high distorting taxation in the distant future. The optimal path of taxation is time inconsistent, with ever-increasing temptation to abandon the path.

JEL-codes: E23 E43 E52 E62 H20 H61 H63 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/mac.20220245 (application/pdf)
https://www.aeaweb.org/articles/materials/22727 (application/pdf)
https://www.aeaweb.org/articles/materials/22728 (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmac:v:17:y:2025:i:2:p:1-23

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/mac.20220245

Access Statistics for this article

American Economic Journal: Macroeconomics is currently edited by Simon Gilchrist

More articles in American Economic Journal: Macroeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().