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Money Demand and Seigniorage-Maximizing Inflation

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Author Info
Easterly, William R
Mauro, Paolo
Schmidt-Hebbel, Klaus

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Abstract

Conventional estimates of the seigniorage-maximizing inflation rate often make use of the Cagan form, which implies a constant semielasticity of money demand with respect to inflation. This paper shows that the elasticity of substitution in transactions between money and bonds determines how the inflation semielasticity of money demand changes as inflation rises. Allowing for a variable semielasticity, estimates of seigniorage-maximizing inflation for a panel of eleven high-inflation countries are lower than those obtained by using the Cagan form. Estimates based on the correct measure of the opportunity cost of money also differ sharply from those obtained when using conventional inflation measures. Copyright 1995 by Ohio State University Press.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 27 (1995)
Issue (Month): 2 (May)
Pages: 583-603
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Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:2:p:583-603

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kiguel, Miguel A, 1989. "Budget Deficits, Stability, and the Monetary Dynamics of Hyperinflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 148-57, May. [Downloadable!] (restricted)
  2. Carl E. Walsh, 1984. "Optimal Taxation by the Monetary Authority," NBER Working Papers 1375, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
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  4. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June. [Downloadable!] (restricted)
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  5. Dornbusch, Rudiger & Fischer, Stanley, 1991. "Moderate inflation," Policy Research Working Paper Series 807, The World Bank. [Downloadable!]
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  6. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  7. Calvo, Guillermo A & Leiderman, Leonardo, 1992. "Optimal Inflation Tax under Precommitment: Theory and Evidence," American Economic Review, American Economic Association, vol. 82(1), pages 179-94, March. [Downloadable!] (restricted)
  8. Reinhart, Carmen & Arrau, Patricio & DeGregorio, Jose & Wickham, Peter, 1991. "The demand for money in developing countries: Assessing the role of financial innovation," MPRA Paper 13691, University Library of Munich, Germany. [Downloadable!]
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  9. Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank. [Downloadable!]
  10. Bruno, Michael & Fischer, Stanley, 1990. "Seigniorage, Operating Rules, and the High Inflation Trap," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 353-74, May. [Downloadable!] (restricted)
  11. Barro, Robert J, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 407-43, May. [Downloadable!] (restricted)
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  12. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May. [Downloadable!] (restricted)
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  13. Arrau, Patricio & de Gregorio, Jose, 1991. "Financial innovation and money demand : theory and empirical implementation," Policy Research Working Paper Series 585, The World Bank. [Downloadable!]
  14. Cooley, Thomas F & Prescott, Edward C, 1976. "Estimation in the Presence of Stochastic Parameter Variation," Econometrica, Econometric Society, vol. 44(1), pages 167-84, January. [Downloadable!] (restricted)
  15. Barro, Robert J, 1972. "Inflationary Finance and the Welfare Cost of Inflation," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 978-1001, Sept.-Oct. [Downloadable!] (restricted)
  16. Bhargava, A & Franzini, L & Narendranathan, W, 1982. "Serial Correlation and the Fixed Effects Model," Review of Economic Studies, Blackwell Publishing, vol. 49(4), pages 533-49, October. [Downloadable!] (restricted)
  17. Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping Hyperinflations Past and Present," NBER Working Papers 1810, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sergey Pekarski, 2007. "Budget deficits and inflation feedback," Working Papers WP13_2007_12, Laboratory for Macroeconomic Analysis. [Downloadable!]
  2. Tatiana Damjanovic & Charles Nolan, 2008. " Seigniorage-maximizing inflation," CDMA Working Paper Series 0807, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  3. Brigitte Granville, 2006. "Integrating poverty reduction in IMF-World Bank Models," Working Papers id:502, esocialsciences.com. [Downloadable!]
  4. Amartya Lahiri & Carlos A. Vegh, 2000. "Delaying the Inevitable: Optimal Interest Rate Policy and BOP Crises," NBER Working Papers 7734, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. repec:bep:maccon:v:5:y:2005:i:1:p:1133-1133 is not listed on IDEAS
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  6. Janvier Nkurunziza, 2004. "How Long Can Inflation Tax Compensate For The Loss Of Government Revenue In War Economies? Evidence From Burundi," Development and Comp Systems 0409065, EconWPA. [Downloadable!]
  7. Joseph H. Haslag & Eric R. Young, 1998. "Money Creation, Reserve Requirements, and Seigniorage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 677-698, July. [Downloadable!] (restricted)
    Other versions:
  8. Amartya Lahiri & Carlos A. Vegh, 2005. "Output Costs, Currency Crises, and Interest Rate Defense of a Peg," NBER Working Papers 11791, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Viktoria Hnatkovska & Amartya Lahiri & Carlos A. Vegh, 2008. "Interest Rates and the Exchange Rate: A Non-Monotonic Tale," NBER Working Papers 13925, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Buiter, Willem H, 2007. "Seigniorage," CEPR Discussion Papers 6152, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  11. Brigitte Granville & Sushanta Mallick, 2005. "How best to link poverty reduction and debt sustainability in IMF--World Bank models?," International Review of Applied Economics, Taylor and Francis Journals, vol. 19(1), pages 67-85, January. [Downloadable!] (restricted)
  12. Fernando de Holanda Barbosa & Tito Nícias Teixeira da Silva Filho, 2008. "Testing Hyperinflation Theories Using the Inflation Tax Curve: A Case Study," Working Papers Series 166, Central Bank of Brazil, Research Department. [Downloadable!]
  13. De Melo, Martha & Denizer, Cevdet, 1997. "Monetary policy during transition : an overview," Policy Research Working Paper Series 1706, The World Bank. [Downloadable!]
  14. Leonardo Villar Gómez, 2004. "Inflación Y Finanzas Públicas," BORRADORES DE ECONOMIA 002852, BANCO DE LA REPÚBLICA. [Downloadable!]
  15. Dairo Estrada & Poldy Osorio, . "Effects of Financial Capital on Colombian Banking Efficiency," Borradores de Economia 291, Banco de la Republica de Colombia. [Downloadable!]
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  16. Raimundo Soto, . "Nonlinearities in the Demand for money: A Neural Network Approach," ILADES-Georgetown University Working Papers inv107, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
  17. Kaufmann, Daniel & O'Connell, Stephen A., 1999. "The macroeconomics of delayed exchange-rate unification : theory and evidence from Tanzania," Policy Research Working Paper Series 2060, The World Bank. [Downloadable!]
  18. Schmidt-Hebbel, Klaus & Serven, Luis, 1992. "Dynamic response to foreign transfers and terms-of-trade shocks in open economies," Policy Research Working Paper Series 1061, The World Bank. [Downloadable!]
  19. Christopher Adam, . "The Transactions Demand for Money in Chile," QEH Working Papers qehwps60, Queen Elizabeth House, University of Oxford. [Downloadable!]
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