The optimal inflation tax when taxes are costly to collect

Fiorella De Fiore

No 38, Working Paper Series from European Central Bank

Abstract: Tax collection costs have been advocated in the literature as a reason to deviate from the Friedman rule, in standard general equilibrium monetary models with flexible prices. This paper shows that there are conditions under which the Friedman rule is optimal despite the presence of collection costs. When these conditions are not satisfied, the optimal inflation tax depends upon the collection costs parameter and schedule, the interest and scale elasticity of money demand, and the compensated labor supply elasticity. Numerical results obtained by calibrating the model on US data suggest that collection costs do not justify substantial departures from Friedman's prescriptions. JEL Classification: E31, E41, E58, E62

Keywords: collection costs; Friedman rule; optimal inflation tax (search for similar items in EconPapers)
Date: 2000-11
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:200038

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