Monetary Policy, Fiscal Policy, and the Inflation Tax: Equivalence Results
Joydeep Bhattacharya, Joseph Haslag, Steven H. Russell
2003
Social Science Research Network
This paper clariÞes and extends previous work on the equivalence between monetary regimes and Þscal regimes involving social security systems. We consider equivalence across regimes, showing that monetary regimes are equivalent to one or both of two alternative types of social security regimes. Two implications emerge. One is that Þnanciing a real expenditure by increasing the inßation rate is equivalent, across regimes, to Þnancing the expenditure by increasing the tax rate on social security
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... eneÞts. In addition, our results imply that a wide range of monetary policy actions are equivalent, across regimes, to Þscal policy actions that change the scale of the social security system and the tax rates on social security beneÞts and/or bank deposits. * This research was begun while Russell was visiting Iowa State University. We gratefully acknowledge helpful conversations with Scott Freeman and Peter Rangazas. 6 As the terms "monetary" and "Þscal" are conventionally deÞned, policies involving government debt are Þscal policies rather than monetary policies. In OLG models, however, Þat currency and unbacked government bonds are so closely related that it does not seem reasonable to distinguish between the two types of policies in this way. In the literature on the interaction between Þscal and monetary policy, for example, Þscal policy is said to be held constant, with respect to changes in monetary policy, as long as the levels of direct taxes, transfers, and government purchases are held Þxed, even if there are changes in the stock of unbacked debt. Changes of the latter type are sometimes described as representing passive actions by the budgetary authority (the Treasury), perfectly anticipated by the central bank, that reconcile the central bank's decisions with the tax and spending decisions of the Þscal authority (the legislature). For this reason, we will deÞne policies involving unbacked debt as monetary rather than Þscal. 7 In closely related work, Mourmouras and Russell (1992) use a model with linear stochastic storage to show that monetary equilibria with reserve requirements and seigniorage can be supported as monetary equilibria with seigniorage, but no reserve requirements, plus taxes on deposit returns. 8 We show in Section 3.2 of this paper that any allocation supported by a currency reserve requirement and unbacked government debt can be supported by a larger currency reserve requirement with no government debt.
doi:10.2139/ssrn.321098
fatcat:27popwm35rftlfkk7yiz6zfiyi