Discussion Paper Details

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Title: Is the Friedman Rule Optimal When Money is an Intermediate Good?

Author(s): Isabel Correia and Pedro Teles

Publication Date: February 1996

Keyword(s): Friedman Rule, Inflation Tax, Intermediate Good and Transactions Technology

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Correia, I and Teles, P. 1996. 'Is the Friedman Rule Optimal When Money is an Intermediate Good?'. London, Centre for Economic Policy Research.