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The Optimal Inflation Tax

Discussion Paper 123 | Revised August 1, 1997

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Pedro Teles Banco de Portugal, Catolica Lisbon SBE, and CEPR
The Optimal Inflation Tax


We determine the second best rule for the inflation tax in monetary general equilibrium models where money is dominated in rate of return. The results in the literature are ambiguous and inconsistent across different monetary environments. We compare the derived optimal inflation tax solutions across the different environments and find that Friedman’s policy recommendation of a zero nominal interest rate is the right one.