The optimal inflation tax when taxes are costly to collect

Tax collection costs have been advocated in the literature as a reason to deviate from the Friedman rule, in standard general equilibrium monetary models with flexible prices. This paper shows that there are conditions under which the Friedman rule is optimal despite the presence of collection costs. When these conditions are not satisfied, the optimal inflation tax depends upon the collection costs parameter and schedule, the interest and scale elasticity of money demand, and the compensated labor supply elasticity. Numerical results obtained by calibrating the model on US data suggest that collection costs do not justify substantial departures from Friedman's prescriptions. JEL Classification: E31, E41, E58, E62

Bank Finance versus Bond Finance: What Explains the Differences Between US and Europe?

Financial structure, agency costs, heterogeneity

Optimal monetary policy in a model of the credit channel

We consider a simple extension of the basic new-Keynesian setup in which we relax the assumption of frictionless financial markets. In our economy, asymmetric information and default risk lead banks to optimally charge a lending rate above the risk-free rate. Our contribution is threefold. First, we derive analytically the loglinearised equations which characterise aggregate dynamics in our model and show that they nest those of the new- Keynesian model. A key difference is that marginal costs increase not only with the output gap, but also with the credit spread and the nominal interest rate. Second, we find that financial market imperfections imply that exogenous disturbances, including technology shocks, generate a trade-off between output and inflation stabilisation. Third, we show that, in our model, an aggressive easing of policy is optimal in response to adverse financial market shocks. JEL Classification: E52, E44Asymmetric information, financial markets, optimal monetary policy

Bank finance versus bond finance: what explains the differences between US and Europe?

We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose among two alternative instruments of external finance-corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher effciency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP.Financial structure, agency costs, heterogeneity

Openness and equilibrium determinacy under interest rate rules

This paper shows that the conditions under which inflation-targeting interest rate rules lead to equilibrium uniqueness in a small open economy in general differ from those in a closed economy. As the monetary authority adjusts nominal interest rates in response to inflation, the real interest rate changes. The overall effect of this change on aggregate demand has important implications for equilibrium determinacy. In an open economy, an increase in the real interest rate is transmitted to aggregate demand through an intertemporal substitution effect, as in a closed economy, but also through a terms of trade effect that is absent in the closed economy. These effects move aggregate demand in opposite directions. We find that, in a broad class of models, the conditions for local equilibrium uniqueness depend crucially on the degree of openness to international trade. Openness matters not only quantitatively, but also qualitatively. JEL Classification: E52, E58, F41indeterminacy, interest rate rules, small open economy, Terms of Trade

The optimal mix of taxes on money, consumption and income

We determine the optimal combination of taxes on money, consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes. We show that the optimal policy does not tax money, regardless of whether the government can use as alternative fiscal instruments an income tax, a consumption tax, or the two taxes jointly. These results are at odds with recent literature. We argue that the reason for this divergence is an inappropriate specification of the transactions technology adopted in the literature.Consumption (Economics) ; Income ; Taxation

Bank finance versus bond finance: what explains the differences between US and Europe?

We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose among two alternative instruments of external finance - corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP. JEL Classification: E20, E44, C68agency costs, financial structure, heterogeneity

The optimal mix of taxes on money, consumption and income

In this paper we determine the optimal combination of taxes on money, consumption and income in transaction technology models. We show that the optimal policy does not tax money, regardless of whether the government can use the income tax, the consumption tax, or the two taxes jointly. These results are at odds with recent literature. We argue that the reason for this divergence is an inappropriate specification of the transaction technology adopted in the literature. JEL Classification: E31, E41, E58, E62

Oil Price Shocks, Monetary Policy Rules and Welfare.

Sudden and protracted oil-price increases are generally accompanied by economic contractions and high inflation. How should monetary policy react to oil-price shocks in order to minimize such adverse macroeconomic effects? We build a DSGE model characterized by two oil-importing countries and one oil-exporting country. Oil-importing countries use oil for consumption and as input in production. The oil-exporting country consumes imported goods and produces oil. We calibrate the model and evaluate the performance of simple Taylor-type interest rate rules, on the basis of a micro-founded welfare metric. We search for rules that i) maximize welfare to a second order of approximation, ii) satisfy the zero-lower-bound for the nominal interest rate and iii) produce either a Nash or a cooperative equilibrium. We show that the optimal reaction of monetary policy is strongly influenced by the presence of energy taxes. For calibrated values of energy taxes, we find that monetary policy should partially accommodate oil-price increases. The optimal interest rate rule is inertial, it reacts strongly and positively to inflation and output deviations from the steady state, while it reacts negatively to deviations of the real price of oil from its steady-state valueoil price shocks, montary policy, fiscal policy, DSGE

Can indeterminacy explain the short-run non-neutrality of money?

This paper analyzes the possibility to generate indeterminacy and equilibria with short-run non-neutrality of money in a model with flexible prices, constant returns to scale in production and constant money growth rules. The model recovers previous results in the literature as particular cases. It is shown that real effects of monetary shocks, as observed in the data, can arise in four regions of the parameter space. Two regions are characterized by unreasonable assumptions, which lead to inferiority of consumption or leisure. Two regions are characterized by reasonable assumptions and by normality of the goods. However, real effects of monetary shocks require implausible parameter values. JEL Classification: E13, E40, E52