Lump-sum taxation and the superneutrality and optimum quantity of money in life cycle growth models

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Abstract

The question of superneutrality and the optimum quantity of money is addressed in a model where money services enter the utility function and where individuals have finite lives. It is demonstrated that the existing result in the literature regarding a positive relationship between money creation and the steady-state capital intensity and welfare is not due to monetary policy per se. On the contrary, this is shown to arise because of the intergenerational wealth effects embedded in the manner in which money is created. Assuming that preferences are separable between consumption goods and real balances and that the consumption goods are normal, it is proved that (i) money is superneutral and (ii) any other money supply rule is Pareto inferior to the Chicago Rule provided that the government also embarks on a policy of wealth redistribution across generations through the imposition of appropriate lump-sum taxes and transfers.

Original languageEnglish (US)
Pages (from-to)339-367
Number of pages29
JournalJournal of Public Economics
Volume36
Issue number3
DOIs
StatePublished - Aug 1988
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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