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The neutrality of the real equilibrium under alternative financing of government expenditures

Authors
Journal
Journal of Monetary Economics
0304-3932
Publisher
Elsevier
Publication Date
Volume
14
Issue
2
Identifiers
DOI: 10.1016/0304-3932(84)90059-x
Disciplines
  • Mathematics
  • Political Science

Abstract

Abstract In this paper we derive necessary and sufficient conditions under which the real equilibrium of an economy is independent of government financing policies. The economy to which these conditions apply has lump-sum taxes, complete markets, and it is characterized by consumers that form expectations rationally under uncertainty. The important theorem we prove is that in such an economy consumption is neutral to alternative government financing policies (weak neutrality) if and only if the present value of taxes paid by each consumer, including the inflation tax, remains fixed, and consumer utility functions are separable in money and consumption. We show that no economy can be simultaneously neutral to financing shifts between debt and taxes, debt and money and money and taxes.

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