File this one under "crazy ideas that might be worth thinking about, even if only to understand our own theories better".

It is generally agreed that an increase in expected inflation will increase Aggregate Demand. That's true for example in a standard ISLM model; expected inflation sticks a vertical wedge between the IS and LM curves, so the ISLM equilibrium is to the right of the point where IS and LM intersect. It's also true in New Keynesian models, where the policy instrument is a nominal interest rate rather than the nominal money supply; expected inflation lowers the real interest rate for any nominal interest rate set by the central bank.

The intuition, for a monetary disequilibrium theorist anyway, is that expected inflation is like a tax on holding the medium of exchange, so it creates an excess supply of the medium of exchange, which means people will want to spend their money.

A tax on holding money would be a good way to increase Aggregate Demand, except it's not very practical. And some economists doubt that central banks have the credibility to increase expected inflation by simply promising to increase inflation. OK, let's accept those assumptions, for the sake of argument.

It is also generally agreed that any policy that involves taxing one good can be replicated by subsidising all other goods, plus lump-sum taxes to restore the same budget balance and distribution of income. If people have a choice between consuming apples and bananas, a tax on eating apples or a subsidy on eating bananas would both have the same effect on choices at the margin -- people would substitute away from eating apples towards eating bananas.

So, if we want to tax money, but find it's impractical to do so, maybe we should subsidise alternatives to money.

In standard, grossly oversimplified, macroeconomic models, there are two assets: money; and "bonds", which represent all other assets. "Bonds" pay interest, but money does not. "The" nominal rate of interest is then the opportunity cost of holding our wealth in the form of non-interest-paying money instead of interest-paying "bonds". And we choose to hold some of our wealth in money, despite the foregone interest, because money is the medium of exchange, and so holding more money makes it easier to do the shopping. A tax on holding money increases the opportunity cost of holding money. A subsidy on holding "bonds" does exactly the same thing.

So any outcome that could be achieved by an increase in expected inflation (which is equivalent to a tax on holding money) could equally be achieved by a subsidy on holding "bonds".

So all economists who want an increase in Aggregate Demand, and who would support an increase in expected inflation if they thought it were feasible, should presumably support a subsidy to holding "bonds".

Now, remember, the "bonds" of our grossly over-simplified macroeconomic models are not the same as real-life bonds. "Bonds" is shorthand for "all non-money assets". So, as an alternative to an increase in expected inflation (i.e. a tax on holding money) those economists should support a subsidy on all non-money assets.

And remember too, most countries already tax the nominal (i.e. non-inflation-adjusted) returns of holding non-money assets. So they wouldn't need to actually subsidise the holding of non-money assets. They could simply reduce the pre-existing taxes on holding non-money assets.

So those economists who want to increase Aggregate Demand, and who would support an increase in expected inflation if they thought it could be achieved, should presumably support a reduction in the tax rates on interest income, dividends, capital gains, corporate profit taxes, land rents, and any other taxes on the returns from holding non-money assets.

OK, they are not quite the same thing. An increase in expected inflation, and a decrease in tax rates on non-money assets, will have different effects on the distribution of income, and on the overall budget balance. And it's hard to think of a practical set of lump-sum taxes which could offset those differences. But try to set that aside.

Think of it purely in macroeconomic terms, just as a thought-experiment. Why wouldn't a reduction in marginal tax rates on all forms of "nominal interest income" (i.e. all forms of "income" from deferred consumption) have exactly the same effect on Aggregate Demand as an increase in expected inflation?

What I am really trying to do in this post is smoke out some of the underlying differences between monetary disequilibrium theory and Neo-Wicksellian (New Keynesian) macroeconomics. Where is the economically-relevant dividing line between "money" and "non-money" assets? If it leads to policy conclusions that might help the US, European, and Japanese economies escape their funks, that's an added bonus.