Monetary Policy, Fiscal Policy, and the Inflation Tax: Equivalence Results

Abstract:     
This paper clarifies and extends previous work on the equivalence between monetary regimes and fiscal regimes involving social security systems. We show that monetary regimes involving currency and unbacked bonds, with or without reserve requirements, are equivalent to one or both of two alternative types of social security regimes. One implication of our results is that financing a real expenditure by increasing the inflation rate is equivalent, across regimes, to financing the expenditure by increasing the tax rate on social security benefits. Another implication is that a wide range of monetary policy actions are equivalent, across regimes, to fiscal policy actions that change the scale of the social security system and the tax rates on social security benefits and/or bank deposits.

Keywords: equivalence, monetary policy, social security

JEL Classification: E60, E63, E31, E21

Accepted Paper Series