In this paper we propose a simple and general model for computing the
Ramsey optimal inflation tax, which includes several models from the
previous literature as special cases. We show that it cannot be claimed
that the Friedman rule is always optimal (or always non--optimal) on
theoretical grounds. The Friedman rule is optimal or not, depending on
conditions related to the shape of various relevant functions. One
contribution of this paper is to relate these conditions to {\it measurable} ...
In this paper we propose a simple and general model for computing the
Ramsey optimal inflation tax, which includes several models from the
previous literature as special cases. We show that it cannot be claimed
that the Friedman rule is always optimal (or always non--optimal) on
theoretical grounds. The Friedman rule is optimal or not, depending on
conditions related to the shape of various relevant functions. One
contribution of this paper is to relate these conditions to {\it measurable}
variables such as the interest rate or the consumption elasticity of money
demand. We find that it tends to be optimal to tax money when there are
economies of scale in the demand for money (the scale elasticity is
smaller than one) and/or when money is required for the payment of
consumption or wage taxes. We find that it tends to be optimal to tax
money more heavily when the interest elasticity of money demand is
small. We present empirical evidence on the parameters that determine
the optimal inflation tax. Calibrating the model to a variety of empirical
studies yields a optimal nominal interest rate of less than 1\%/year,
although that finding is sensitive to the calibration.
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