Working Paper: NBER ID: w2270
Authors: N. Gregory Mankiw
Abstract: This paper presents and tests a positive theory of monetary and fiscal policy. The government chooses the rates of taxation and inflation to minimize the present value of the social cost of raising revenue given exogenous expenditure and an intertemporal budget constraint. The theory implies that nominal interest rates and inflation are random walks. It also implies that nominal interest rates and inflation move together with tax rates. United States data from 1952 to 1985 provide some support for the theory.
Keywords: seigniorage; inflation; taxation; nominal interest rates
JEL Codes: E31; E62; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal government revenue (H27) | Nominal interest rates (E43) |
| Federal government revenue (H27) | Inflation (E31) |
| Tax rates (H29) | Nominal interest rates (E43) |
| Tax rates (H29) | Inflation (E31) |
| Nominal interest rates (E43) | Inflation (E31) |