Myopic Fiscal Objectives and Long-Run Monetary Efficiency

Gaetano Gaballo and Eric Mengus

No 17360, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Is the pursuit of myopic fiscal objectives, such as short-run redistribution or public spending, a threat to long-run monetary efficiency? We answer this question in the context of a textbook overlapping generations model where we introduce a sequence of one-period fiscal authorities that can tax endowments and trade money. Each authority is myopic in that it cares only about current agents' utility and its own consumption, without any concern about the future. Nonetheless, we show that the sequence of fiscally-backed money purchases that maximize the current authority's objective also selects a unique equilibrium -- one in which money is traded at the efficient intertemporal price -- as a by-product. In fact, myopic redistribution policies ensure equality in marginal utilities making up for incomplete markets, without interfering with the efficiency of private intertemporal choices. Multiplicity and sub-optimality emerge as fiscal capacity is bounded, inducing authorities to use money trades to generate resources for public consumption.

Keywords: Fiat money; Price level determination; Fiscal-monetary interactions; Seigniorage; Commitment; Ramsey plans (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E62 E63 (search for similar items in EconPapers)
Date: 2022-06
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