On the Complementarity of Commercial Policy, Capital Controls and Inflation Tax

40 Pages Posted: 19 Jun 2004 Last revised: 1 May 2022

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Date Written: March 1985

Abstract

This paper studies the optimal use of distortive policies aimed at raising a given real revenue, in a general equilibrium framework in which lump-sum taxes are absent. The policies analyzed are an inflation tax,commercial policy, and an implicit tax on capital inflows implemented by capital controls. It is shown that we would tend to avoid activating an inflation tax for small revenue needs. Furthermore, if the policy target were allocative, we would tend to use only one policy instrument.Thus, each policy has its own comparative advantage, and their combined use is justified when the target is raising government revenue. As a by-product of the paper,we study the determinants of exchange rates, prices, and quantities in an economy subject to capital controls and commercial policy.

Suggested Citation

Aizenman, Joshua, On the Complementarity of Commercial Policy, Capital Controls and Inflation Tax (March 1985). NBER Working Paper No. w1583, Available at SSRN: https://ssrn.com/abstract=227450

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

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