Research

We examine how present bias affects deficit, inflation, and welfare in an economy where the deficit is funded by a seigniorage tax. In a hyperbolic discounting economy, reduced money holdings due to the desire for immediate consumption cause a decline in the sustainable deficit limit. To meet the targeted deficit, the government must raise seigniorage tax collection, especially with present bias. This results in increased inflation rates and higher welfare costs associated with the deficit for hyperbolic discounting individuals.

This paper studies how a time-inconsistent preference affects wealth inequality over heterogeneous agents in a classical money-in-utility model and investigates the effect of a paternalistic government policy on inequality and welfare. We show that at the steady state, present bias aggravates wealth inequality through the changes in interest rates and capital holding when heterogeneity exists in wealth formation across households. We provide the policy design rule aiming to correct behavioral mistakes under present bias and achieve benchmark allocations. The joint implementation of paternalistic fiscal and monetary policies can correct one's inefficient behaviors induced by present bias. In the presence of heterogeneity, an additional type-dependent money transfer is required to replicate the benchmark allocations in a hyperbolic economy due to the different amounts of distortion in the real money value over heterogeneous households by the monetary policy. Our numerical analysis confirms that the paternalistic policy can alleviate inequality and improve the welfare of both types of consumers using both true (long-run) and choice (short-run) utility. Especially, the short-run criterion shows the policy is Pareto-improving. The welfare improvement effect is larger for those who do not participate in a capital market since the non-participants cannot offset the decrease in their wealth by the lower capital accumulation in an economy without a capital asset. On the other hand, the participants experience a higher return rate from capital by the lower capital, so their inefficient steady-state allocation deviates not so much as the non-participants from the benchmark one.