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Optimal Taxes Under Private Information: The Role of the Inflation

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Abstract

We consider an overlapping generation framework with search and private information to study optimal taxation. Agents sequentially trade in markets that are characterized by different frictions and trading protocols. In frictional decentralized markets, agents receive shocks that determine if they are going to be consumers or producers. Shocks are private information. Mechanism design is used to solve for the constrained optimal allocation. We then study whether a government can replicate the constrained optimal allocation with an array of policy instruments including fiat money. We show that if the government has a full set of non-linear taxes, then lump-sum taxes and inflation are irrelevant for the allocation. However, if the government is constrained to use linear taxes, then using the inflation tax is optimal even if lump-sum taxes are available.

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  • Pedro Gomis-Porqueras & Christopher J. Waller, 2017. "Optimal Taxes Under Private Information: The Role of the Inflation," Working Papers 2017-014, Federal Reserve Bank of St. Louis, revised 20 Aug 2020.
    • Handle: RePEc:fip:fedlwp:2017-014
    DOI: 10.20955/wp.2017.014
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    Cited by:

    1. Athanasios Geromichalos & Lucas Herrenbrueck, 2022. "The Liquidity-Augmented Model of Macroeconomic Aggregates: A New Monetarist DSGE Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 134-167, July.
    2. Huber, Samuel & Kim, Jaehong, 2020. "An overlapping generations model for monetary policy analysis," European Economic Review, Elsevier, vol. 125(C).

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    More about this item

    Keywords

    Fiat Money; Taxation; Private Information;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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