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Using a pure-exchange overlapping generatior^ model in which money -is valued because of a legal restriction, we show the following: a) a benevolent government may make some use of the inflation t^ in conjunction with a lump-sum income tax on the young, b) the inflation tax will not be used dong with- a lump-sum income tax on the old, and c) the welfare-maximizing monetary policy may-deviate from the Friedman rule (contract the money supply so as to equate the real return on money and other competing stores of value) depending on how fiscal policy is implemented...

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This report has been published in Review of Economic Dynamics, Volume 4, Issue 4, October 2001, pp. 823-841