Dynamic Taxation, Private Information and Money

The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange

are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In ‘middle age’, agents receive preference shocks and trade amongst themselves in an anonymous search market. Money is essential in this market. Since preference shocks are private information, in a record-keeping economy without money, the planner’s allocation trades off efficient risk sharing against production efficiency in the search market and average consumption when old. For a government to replicate this outcome in a monetary economy without record-keeping, distortionary taxation of money balances is needed.

For more information, contact Iourii Manovskii.