Working Paper: CEPR ID: DP1287
Authors: Isabel Correia; Pedro Teles
Abstract: In contrast to the recent literature on the optimal inflation tax, we show that, in models where money reduces transactions costs, it is optimal to set the inflation tax to zero when seigniorage is replaced by revenue from distortionary taxes. The main reasons for this result are that the variable costs of supplying real balances are negligible and the inflation tax is a unit tax. We also show that the intermediate good optimal taxation rules, in the public finance literature, cannot be directly applied both when money is costless and when it requires resources to be produced.
Keywords: inflation tax; transactions; technology; intermediate good; Friedman rule
JEL Codes: E31; E41; E58; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negligible costs of producing real money (E49) | optimal inflation tax is zero (H21) |
| costs of producing real money (E42) | optimal taxation of real balances (H21) |
| degree of homogeneity of transaction costs functions (F12) | optimal taxation of real balances (H21) |
| constant returns to scale in transaction costs function (D24) | inflation tax should remain zero (E31) |
| deviations from constant returns to scale (D24) | different optimal taxation outcomes (H21) |
| specific structures of production and taxation in monetary economies (E42) | optimality of the Friedman rule (H21) |