Collection Lags and the Optimal Inflation Tax: A Reconsideration
IMF Working Papers, July 1, 1993
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- Collection Lags and the Optimal Inflation Tax: A Reconsideration
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Bibliographic details
- Authors: José A. Tijerina, Alex Mourmouras
- Published: July 1, 1993
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451965346.001
Summary
- Re-examines the argument that collection lags combined with inflation erode fiscal revenues and thus argue against seigniorage.
- Uses an overlapping generations version of Dixit’s model to analyze how collection lags affect the desired rate of inflation.
- Main conclusion: depending on the specification of the collection cost function and the size of government spending in GDP, collection lags may increase, leave unchanged, or reduce the desired rate of inflation.
Research question and approach
- Research question: How do collection lags affect the optimal inflation tax and desired tax structures?
- Model and approach:
- Overlapping generations version of Dixit (1991) model.
- General equilibrium framework adapted to analyze collection lags and collection cost functions.
Key findings
- Collection lags do not have a uniform effect on the desired rate of inflation; outcomes depend on:
- The specification of the collection cost function.
- The size of government spending in GDP.
- Possible effects on desired inflation:
- Increase the desired rate of inflation.
- Leave the desired rate of inflation unchanged.
- Reduce the desired rate of inflation.
Policy implications
- Policy prescriptions regarding seigniorage and inflation taxation cannot rely on a single, general conclusion about collection lags; they must account for:
- The functional form of collection costs.
- The scale of government spending relative to GDP.
- Optimal tax structure assessments should incorporate collection lag dynamics within a general equilibrium, overlapping generations framework.