Record Detail Back
Chapter 1 Monetary and Fiscal Policy1
- Share to:
A public-finance approach yields several insights. Among the most important is the recognition that fiscal and monetary policies are linked through the government sector’s budget constraint. Variations in the inflation rate can have implications for the fiscal authority’s decisions about expenditures and taxes, and, conversely, decisions by the fiscal authority can have implications for money growth and inflation.
When inflation is viewed as a distortionary revenue-generating tax, the degree to which it should be relied upon depends on the set of alternative taxes available to the government and on the reasons individuals hold money. Whether the most appropriate strategy is to think of money as entering the utility function as a final good or as serving as an intermediate input into the production of transaction services can have implications for whether money should be taxed. The optimal-tax perspective also has empirical implications for inflation.