Growth and Distributional Effects of Inflation with Progressive Taxation

This paper examines the growth and income distribution effects of inflation in a growing economy with heterogeneous households and progressive income taxation. Assuming that the cash-in-advance constraint applies to investment as well as to consumption spending, we show that a higher growth of monetary supply yields a negative impact on growth and an ambiguous effect on income distribution. Numerical example with plausible parameter values, however, demonstrate that those long-run effects of money growth are rather small. In contrast, fiscal distortion caused by progressive taxation yield significant impacts on growth and distribution.