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Incentive-Feasible Deflation

For economies in which the real rate of return on money is too low, the standard prescription is to deflate prices according to the Friedman rule. Implicit in this recommendation is the availability of a lump-sum tax instrument. In this paper, I view lump-sum tax obligations as a form of debt subject to default. While individuals may agree to honor such obligations ex ante, a lack of commitment (the sine qua non of modern monetary theory) may prevent them from following through on their promises ex post. In such cases, there may exist an incentive- induced limit to deflationary policy.

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https://doi.org/10.20955/wp.2011.038

https://doi.org/10.1016/j.jmoneco.2013.03.002


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