Working Paper: CEPR ID: DP17360
Authors: Gaetano Gaballo; Eric Mengus
Abstract: Is the pursuit of myopic fiscal objectives, such as short-run redistribution or public spending, a threat to long-run monetary efficiency? We answer this question in the context of a textbook overlapping generations model where we introduce a sequence of one-period fiscal authorities that can tax endowments and trade money. Each authority is myopic in that it cares only about current agents' utility and its own consumption, without any concern about the future. Nonetheless, we show that the sequence of fiscally-backed money purchases that maximize the current authority's objective also selects a unique equilibrium -- one in which money is traded at the efficient intertemporal price -- as a by-product. In fact, myopic redistribution policies ensure equality in marginal utilities making up for incomplete markets, without interfering with the efficiency of private intertemporal choices. Multiplicity and sub-optimality emerge as fiscal capacity is bounded, inducing authorities to use money trades to generate resources for public consumption.
Keywords: fiat money; price level determination; fiscal-monetary interactions; seigniorage; commitment; Ramsey plans
JEL Codes: E31; E52; E58; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| myopic fiscal objectives (E62) | long-run monetary efficiency (E49) |
| myopic redistribution policies (H23) | equality in marginal utilities (D11) |
| equality in marginal utilities (D11) | efficiency of private intertemporal choices (D15) |
| myopic authorities' actions (D73) | efficient intertemporal price for money (E41) |
| bounded fiscal capacity (H72) | multiplicity and suboptimality in outcomes (D00) |
| myopic policies (E65) | efficient allocation of resources (D61) |
| optimality conditions from private portfolio choices (G11) | unconstrained long-run social planner problem (D69) |