Dynamic Taxation, Private Information and Money

FRB of St. Louis Working Paper No. 2009-035A

32 Pages Posted: 10 Aug 2009

See all articles by Christopher J. Waller

Christopher J. Waller

Federal Reserve Banks - Federal Reserve Bank of St. Louis; University of Notre Dame - Department of Economics

Date Written: August 6, 2009

Abstract

The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In middle age, agents receive preference shocks and trade amongst them- selves in an anonymous manner. Since preference shocks are private information, in a record-keeping economy, the planner’s constrained allocation trades off efficient risk sharing against production efficiency in the search market. In the absence of record-keeping, the government uses flat money as a substitute for dynamic contracts to induce truthful revelation of preferences. Inflation affects agents’ incentive constraints and so distortionary taxation of money may be needed as part of the optimal policy even if lump-sum taxes are available.

Keywords: Money, Search, Taxation, Mirrlees

JEL Classification: E40, H21

Suggested Citation

Waller, Christopher J., Dynamic Taxation, Private Information and Money (August 6, 2009). FRB of St. Louis Working Paper No. 2009-035A. Available at SSRN: https://ssrn.com/abstract=1445011 or http://dx.doi.org/10.2139/ssrn.1445011

Christopher J. Waller (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis

411 Locust St
Saint Louis, MO 63011
United States

University of Notre Dame - Department of Economics ( email )

434 Flanner Hall
Notre Dame, IN 46556
United States
574-631-4963 (Phone)
574-631-9238 (Fax)

HOME PAGE: http://www.nd.edu/~cwaller/

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