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THE TIMING OF TAX COLLECTIONS AND THE STRUCTURE OF “IRRELEVANCE” THEOREMS IN A CASH-IN-ADVANCE MODEL

Published online by Cambridge University Press:  15 June 2010

Thomas J. Sargent  and
Bruce D. Smith
Thomas J. Sargent*
Affiliation:
Hoover Institution, Stanford University and New York University
Bruce D. Smith
Affiliation:
University of Texas
*
Address correspondence to: Thomas J. Sargent, Economics Department, New York University, 19 W. 4th Street, 6th floor, New York, NY 10012, USA; e-mail: [email protected].
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Abstract

A standard timing protocol in a cash-in-advance model allows the government to elude the inflation tax. That matters. Altering the timing of tax collections to make the government hold cash overnight disables some classical propositions but enables others. The altered timing protocol loses a Ricardian proposition and also the proposition that open market operations, accompanied by tax adjustments needed to finance the change in interest on bonds due the public, are equivalent to pure units changes. The altered timing enables a Modigliani–Miller equivalence proposition that does not otherwise prevail.

Keywords

Ricardian EquivalenceQuantity Theory of MoneyModigliani–Miller Theorem
Type
Vintage Article
Information
Macroeconomic Dynamics , Volume 14 , Issue 4 , September 2010 , pp. 585 - 603
Copyright
Copyright © Cambridge University Press 2010

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