DP17360 Myopic Fiscal Objectives and Long-Run Monetary Efficiency
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 endowment 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, even if authorities are myopic and do not coordinate, policy implementation gets efficiently constrained through markets by private agents’ intertemporal choices. Details about the fiscal stance are also crucial. Multiplicity and sub-optimality emerge as fiscal capacity is bounded, inducing authorities to use money trade to generate resources for public consumption.