Inflation And Taxation With Optimizing Governments

James Poterba and Julio Rotemberg

No 2567, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper extends and evaluates previous work on the positive theory of inflation. We examine the behavior of governments concerned solely with minimizing the deadweight loss from raising revenue through inflation and tax finance. We show that both governments that can commit to future policy actions, as well as those that cannot precommit, will choose a positive contemporaneous association between inflation and the level of tax burdens. We examine the empirical validity of this prediction using data from Britain, France, Germany, Japan, and the United States. Inflation and tax rates are as likely to be negatively as positively correlated, so the results cast doubt on the empirical relevance of simple models in which governments with time-invariant tastes choose monetary policy to equate the marginal deadweight burdens of inflation and taxes.

Date: 1988-04
Note: EFG PE
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Published as Poterba, James M. and Julio J. Rotemberg, "Inflation And Taxation With Optimizing Governments." Journal of Money, Credit, and Banking, Vol. 22, No. 1, pp. 1-18, (February 1990).

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Journal Article: Inflation and Taxation with Optimizing Governments (1990)
Working Paper: INFLATION AND TAXATION WITH OPTIMIZING GOVERNMENTS (1989)
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