Inflation and Taxation with Optimizing Governments

38 Pages Posted: 12 Jul 2010

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased); National Bureau of Economic Research (NBER) (deceased)

Date Written: April 1988

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.

Suggested Citation

Poterba, James M. and Rotemberg, Julio J., Inflation and Taxation with Optimizing Governments (April 1988). NBER Working Paper No. w2567. Available at SSRN: https://ssrn.com/abstract=1638805

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased) ( email )

Cambridge, MA
United States
617-495-1015 (Phone)
617-496-5994 (Fax)

National Bureau of Economic Research (NBER) (deceased)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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