Chapter

Sunspots and Non-Linear Dynamics

Volume 31 of the series Studies in Economic Theory pp 387-402

Date:

Winners and Losers from Price-Level Volatility: Money Taxation and Information Frictions

  • Guido CozziAffiliated withUniversity of St.Gallen
  • , Aditya GoenkaAffiliated withUniversity of Birmingham
  • , Minwook KangAffiliated withNanyang Technological University
  • , Karl ShellAffiliated withCornell University Email author 

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Abstract

We analyze an economy with taxes and transfers denominated in dollars and an information friction. It is the information friction that allows for volatility in equilibrium prices and allocations. When the price level is expected to be stable, the competitive equilibrium allocation is Pareto optimal. When the price level is volatile, it is not Pareto optimal, but the stable equilibrium allocations do not necessarily dominate the volatile ones. There can be winners and losers from volatility. We identify winners and losers and describe the effect on them of increases in volatility. Our analysis is an application of the weak axiom of revealed preference in the tax-adjusted Edgeworth box.