Monetary policy and redistribution: What can or cannot be neutralized with Mirrleesian taxes

Firouz Gahvari and Luca Micheletto

No 2012:5, Working Paper Series, Center for Fiscal Studies from Uppsala University, Department of Economics

Abstract: This paper develops an overlapping-generations model with heterogeneous agents in terms of earning ability and cash-in-advance constraint. It shows that tax pol- icy cannot fully replicate or neutralize the redistributive implications of monetary policy. While who gets the extra money becomes irrelevant, the rate of growth of money supply keeps its bite. A second lesson is that the Friedman rule is not in general optimal. The results are due to the existence of another source of het- erogeneity among individuals besides di erences in earning ability that underlies the Mirrleesian approach to optimal taxation. They hold even in the presence of a general income tax and preferences that are separable in labor supply and goods. If di erences in earning ability were the only source of heterogeneity, the scal au- thority would be able to neutralize the e ects of a change in the rate of monetary growth and a version of the Friedman rule becomes optimal.

Keywords: Monetary policy; scal policy; redistribution; Friedman rule; heterogeneity; overlapping generations; second best 1 (search for similar items in EconPapers)
JEL-codes: H21 H52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2012-01-25
New Economics Papers: this item is included in nep-dge, nep-mon and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Monetary Policy and Redistribution: What can or cannot be Neutralized with Mirrleesian Taxes (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:uufswp:2012_005

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