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

Author

Listed:
  • Gahvari, Firouz

    (Department of Economics, University of Illinois)

  • Micheletto, Luca

    (Uppsala Center for Fiscal Studies)

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.

Suggested Citation

  • Gahvari, Firouz & Micheletto, Luca, 2012. "Monetary policy and redistribution: What can or cannot be neutralized with Mirrleesian taxes," Working Paper Series, Center for Fiscal Studies 2012:5, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uufswp:2012_005
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    References listed on IDEAS

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    Cited by:

    1. Soldatos, Gerasimos T. & Varelas, Erotokritos, 2014. "The Chicago Tradition and Commercial Bank Seigniorage," MPRA Paper 57721, University Library of Munich, Germany.
    2. varelas, erotokritos, 2013. "A Comment on Chicago Rule, Chicago School, and Commercial Bank Seigniorage," MPRA Paper 48770, University Library of Munich, Germany.
    3. Erotokritos Varelas & Gerasimos T. Soldatos, 2014. "The Chicago Tradition and Commercial Bank Seigniorage," Research in World Economy, Research in World Economy, Sciedu Press, vol. 5(1), pages 29-38, March.
    4. Soldatos, Gerasimos T., 2014. "Local Taxation, Private-Public Consumption Complementarity, and the Optimal Number of Jurisdictions," MPRA Paper 60861, University Library of Munich, Germany.

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    More about this item

    Keywords

    Monetary policy; scal policy; redistribution; Friedman rule; heterogeneity; overlapping generations; second best 1;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education

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