OPTIMUM FISCAL AND MONETARY POLICY USING THE MONETARY OVERLAPPING GENERATION MODELS

Abstract

Government financing is one of the most important issues that any economy is faced with it. In a capitalism system, the government can only finance their expenditure from taxes. Taxes could levy on any goods, services and activity but the important problem is the good and how much one of them must pay the tax? According to Characteristics of each good, the effect of levying the tax on it in economy is different. In this article we show the money is the best goods that government can levy the tax on it. If the government want collect the constant quantity of tax, welfare loose of levying the tax on money is smaller than other goods. These results achieve
from Frank Ramsey paper and John Maynard Keynes book. Other problem than answered this article is determining the optimum rate of tax on money (inflation tax) in an overlapping generation model that characterized the four sector economy.