NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Joshua Aizenman

NBER Working Paper No. 1583 (Also Reprint No. r0726)
Issued in March 1985
NBER Program(s):   ITI   IFM

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.

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Document Object Identifier (DOI): 10.3386/w1583

Published: Canadian Journal of Economics, Vol. 19, No. 1, pp. 114-133, (February 1986)

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