Taxes Denominated in Money

The overlapping-generations model is defined by its particular (but very natural) demographic structure. Following Samuelson’s lead, applications of the overlapping-generations model frequently involve taxes and transfers denominated in money. Balasko and Shell provide the basic analysis of these money taxes and transfers in both the OG economy and the finite horizon economy. The set of bonafide fiscal policies — those money taxes and transfers that permit money to have positive value — satisfies “absence of money illusion” (but not necessarily the quantity theory). The set of equilibrium money prices is not in general connected. Asymptotic retirement of the public debt is neither necessary nor sufficient for bonafidelity.

For finite economies, matters are simpler: (1) Fiscal policies that are not balanced are not bonafide. (2) If consumers are productively-related (or if the economy is irreducible), then balanced policies are bonafide. See Balasko and Shell (1985, 1993).

References

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“Winners and Losers from Price-Level Volatility: Money Taxation and Information Frictions”(with Guido Cozzi, Aditya Goenka, and Minwook Kang), CAE Working Paper #15-01, July 2015.
“Price Level Volatility and Optimal Taxation” (with Guido Cozzi, Aditya Goenka, and Minwook Kang), September 2015.