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NONCONNECTEDNESS OF THE SET OF BANKRUPTCY-FREE MONEY EQUILIBRIA IN THE STATIC ECONOMY: A CONSTRUCTIVE EXAMPLE

Published online by Cambridge University Press:  07 March 2013

Minwook Kang
Minwook Kang*
Affiliation:
Cornell University
*
Address correspondence to: Minwook Kang, Department of Economics, Cornell University, 453 Uris Hall, Ithaca, NY 14853, USA; e-mail: mk792@cornell.edu.
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Abstract

A static economy in which nominal taxes and transfers are balanced, as proposed by Balasko and Shell (1993), typically has a continuum of equilibrium money prices. This paper presents a constructive example in which the set of equilibrium money prices is not connected. By allowing negative consumption as a mathematical construct, closed form solutions for equilibrium tax-adjusted income are derived. The main result of the example implies that bankrupt taxpayers with negative tax-adjusted income can be free from bankruptcy as the price of money increases. This paradoxical outcome is similar to that of the transfer paradox, as suggested by Gale (1974), where tax-transfer plans make taxpayers better off.

Keywords

Nominal Taxes and TransfersTransfer ParadoxTax-Adjusted IncomeBankruptcy
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 7 , October 2014 , pp. 1539 - 1546
Copyright
Copyright © Cambridge University Press 2013 

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References

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