Fiscal Requirements for Dynamic and Real Determinacies in Economies with Private Provision of Liquidity: A Monetarist Assessment

Abstract

We study the impact of fiscal policies on the inherent links between inflation, unemployment, and asset prices in an environment where firms provide liquidity and the central bank follows a constant money growth rate rule. Firms, other than hiring workers, also supply private assets that are not only useful as a store of value but also as collateral. When firms are not taxed and public debt is scarce, the economy is non‐Ricardian so that real indeterminacies can be observed. Moreover, labor market characteristics do not affect the demand for government liabilities. However, when agents face public and private asset scarcity, labor market conditions then impact asset prices and inflation. We further show that irrespective of the type of asset scarcity agents face, when firms are taxed non‐ad valorem, not only the level of tax revenues but also its composition matter for real allocations. Moreover, we show that labor market conditions directly affect the dynamics of all government liabilities and inflation.