Money taxes, market segmentation, and sunspot equilibria

Research output: Contribution to journalArticlepeer-review

Abstract

This paper investigates how volatile the general price level can be in an equilibrium where all uncertainty is extrinsic. The government operates a lump-sum redistribution policy using flat money. An approach to modeling asset market segmentation is introduced in which this tax policy determines how volatile the price level can be, which in turn determines the volatility of consumption. The paper characterizes (i) the set of general price levels consistent with the existence of competitive equilibrium and (ii) the resulting set of equilibrium allocations. The results demonstrate how redistribution policies that are fixed in nominal terms can have a destabilizing effect on an economy, and show how to evaluate the amount of volatility that a particular policy may induce.

Original languageEnglish (US)
Pages (from-to)327-352
Number of pages26
JournalMacroeconomic Dynamics
Volume5
Issue number3
DOIs
StatePublished - Jun 2001
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Economic volatility
  • Indeterminacy
  • Segmented markets
  • Taxation

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