fiscal-monetary theories of inflation

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1、Chapter26Fiscal-MonetaryTheoriesofInflation26.1.TheissuesThischapterintroducessomeissuesinmonetarytheorythatmostlyrevolvearoundcoordinatingmonetaryandfiscalpolicies.Westartfromtheobserva-tionthatcompletemarketsmodelshavenoroleforinconvertiblecurrency,andthereforeassig

2、nzerovaluetoit.1Wedescribeonewaytoalteracompletemar-ketseconomysothatapositivevalueisassignedtoaninconvertiblecurrency:weimposeatransactiontechnologywithshoppingtimeandrealmoneybalancesasinputs.2Weusethemodeltoillustrate10doctrinesinmonetaryeconomics.Mostofthesedoct

3、rinestranscendmanyofthedetailsofthemodel.Theim-portantthingaboutthetransactionstechnologyisthatitmakesdemandforcurrencyadecreasingfunctionoftherateofreturnoncurrency.Ourmonetarydoctrinesmainlyemergefrommanipulatingthatdemandfunctionandthegov-ernment’sintertemporalbu

4、dgetconstraintunderalternativeassumptionsaboutgovernmentmonetaryandfiscalpolicy.31Incompletemarketsmodels,moneyholdingswouldonlyserveasastoreofvalue.Thefollowingtransversalityconditionwouldholdinanonstochasticeconomy:T−1−1mT+1limR=0.T→∞tpTt=0Therealreturnonmoney,pt/

5、pt+1,wouldhavetoequalthereturnRtonotherassets,which,substitutedintothetransversalitycondition,yieldsT−1pt+1mT+1mT+1lim=lim=0.T→∞ptpTT→∞p0t=0Thatis,aninconvertiblemoney(i.e.,oneforwhichlimT→∞mT+1>0)mustbevalueless,p0=∞.2SeeBennettMcCallum(1983)foranearlyshoppingtime

6、specification.3Manyofthedoctrineswereoriginallydevelopedinsetupsdifferingindetailsfromtheoneinthischapter.–1045–1046Fiscal-MonetaryTheoriesofInflationAfterdescribingour10doctrines,weusethemodeltoanalyzetwoimportantissues:thevalidityofFriedman’sruleinthepresenceofdistor

7、tingtaxation,anditssustainabilityinthefaceofatimeconsistencyproblem.Here,weusethemethodsforsolvinganoptimaltaxationproblemwithcommitmentinchapter16,andforcharacterizingacrediblegovernmentpolicyinchapter23.26.2.AshoppingtimemonetaryeconomyConsideranendowmenteconomywi

8、thnouncertainty.Arepresentativehouse-holdhasoneunitoftime.Thereisasinglegoodofconstantamounty>0eachperiodt≥0.Thegoodcanbedividedbetweenpri