THE OPTIMAL INFLATION TAX WHEN MONEY REDUCES TRANSACTIONS COSTS - A RECONSIDERATION

It has been argued that, if money acts as an intermediate good, the optimal inflation tax is zero. This paper reexamines such a claim in the context of a model in which money reduces transactions costs. It is shown that modeling money as an intermediate good does not necessarily imply that the optimal inflation tax is zero. The optimality of a zero inflation tax depends on the properties of the transactions costs technology. In particular, if the transactions costs technology does not exhibit constant returns to scale, it is optimal to resort to the inflation tax.