THE TIMING OF TAX COLLECTIONS AND THE STRUCTURE OF “IRRELEVANCE” THEOREMS IN A CASH-IN-ADVANCE MODEL

Thomas Sargent and Bruce Smith

Macroeconomic Dynamics, 2010, vol. 14, issue 4, 585-603

Abstract: A standard timing protocol in a cash-in-advance model allows the government to elude the inflation tax. That matters. Altering the timing of tax collections to make the government hold cash overnight disables some classical propositions but enables others. The altered timing protocol loses a Ricardian proposition and also the proposition that open market operations, accompanied by tax adjustments needed to finance the change in interest on bonds due the public, are equivalent to pure units changes. The altered timing enables a Modigliani–Miller equivalence proposition that does not otherwise prevail.

Date: 2010
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