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Sunspots and Non-Linear Dynamics pp 387–402Cite as

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

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Part of the book series: Studies in Economic Theory ((ECON.THEORY,volume 31))

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.

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Notes

  1. 1.

    Our present interpretation is that the government sets money taxes. Hence we have outside money. Another interpretation (due to Neil Wallace) is that what we call taxes and transfers actually represent past private money borrowing and lending, a case of inside money. Either interpretation is okay. The tax interpretation is the better one for our 2 companion papers on endogenous money taxation.

  2. 2.

    One might think that, in practice, all observed taxes are real taxes. We disagree. Even income taxes are due in dollars this year but based on last year’s dollar income. The money taxes in this paper are meant to be suggestive of general issues arising in modern economies, ones with dollar-denominated financial instruments.

  3. 3.

    Our model is an extension of the exogenous taxation model of Bhattacharya et al. (1998). We are currently working on volatility and endogeneous taxation. We are preparing 2 papers on endogenous money taxation, one on optimal taxation–the other on voting. See Cozzi et al. (2015, 2016).

  4. 4.

    See Chipman (1974) Theorem 3, p. 32.

  5. 5.

    See Balasko-Shell (1993) on balancedness and bonafidelity.

  6. 6.

    See Aumann (1987) for the definition of correlated equilibrium in games. See Peck and Shell (1991) for correlated sunspots in imperfectly competitive market economies. See also Aumann et al. (1985).

References

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Author information

Authors and Affiliations

  1. University of St.Gallen, St.Gallen, Switzerland

    Guido Cozzi

  2. University of Birmingham, Birmingham, England

    Aditya Goenka

  3. Nanyang Technological University, Singapore, Singapore

    Minwook Kang

  4. Cornell University, 402 D Uris Hall, Ithaca, NY, 14853-7601, USA

    Karl Shell

Authors
  1. Guido Cozzi
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  2. Aditya Goenka
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  3. Minwook Kang
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  4. Karl Shell
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Corresponding author

Correspondence to Karl Shell .

Editor information

Editors and Affiliations

  1. Research Institute for Economics and Business Administration, Kobe University, Kobe, Japan

    Kazuo Nishimura

  2. GREQAM, Marseille, France

    Alain Venditti

  3. Department of Economics, University of Iowa , Iowa-City, Iowa, USA

    Nicholas C. Yannelis

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Cozzi, G., Goenka, A., Kang, M., Shell, K. (2017). Winners and Losers from Price-Level Volatility: Money Taxation and Information Frictions. In: Nishimura, K., Venditti, A., Yannelis, N. (eds) Sunspots and Non-Linear Dynamics. Studies in Economic Theory, vol 31. Springer, Cham. https://doi.org/10.1007/978-3-319-44076-7_16

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