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Seigniorage-Maximizing Inflation under Sticky Prices

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  • TATIANA DAMJANOVIC
  • CHARLES NOLAN

Abstract

What is the seigniorage-maximizing level of inflation? Three models' formulae for the seigniorage-maximizing inflation rate (SMIR) are compared. A sticky-price model prescribes a somewhat lower SMIR to Cagan's formula and a variant of a flex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labor market: The sticky-price (Calvo) model implies that inflation and output are negatively related and that output is falling in price stickiness. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the United States and the United Kingdom may be quite close to the SMIR. Copyright (c) 2010 The Ohio State University.

Suggested Citation

  • Tatiana Damjanovic & Charles Nolan, 2010. "Seigniorage-Maximizing Inflation under Sticky Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2-3), pages 503-519, March.
    • Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:2-3:p:503-519
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    References listed on IDEAS

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    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under sticky prices," Journal of Economic Theory, Elsevier, vol. 114(2), pages 198-230, February.
    2. Robert E. Lucas, 2001. "Inflation and Welfare," International Economic Association Series, in: Axel Leijonhufvud (ed.), Monetary Theory as a Basis for Monetary Policy, chapter 4, pages 96-142, Palgrave Macmillan.
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    4. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    5. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 583-603, May.
    6. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    7. Kimbrough, Kent P., 2006. "Revenue maximizing inflation," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1967-1978, November.
    8. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1415-1464.
    9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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    Cited by:

    1. Leith, Campbell & Liu, Ding, 2016. "The inflation bias under Calvo and Rotemberg pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 283-297.
    2. Di Bartolomeo, Giovanni & Tirelli, Patrizio & Acocella, Nicola, 2014. "Trend inflation, the labor market wedge, and the non-vertical Phillips curve," Journal of Policy Modeling, Elsevier, vol. 36(6), pages 1022-1035.
    3. Damjanovic, Tatiana & Nolan, Charles, 2011. "Second-order approximation to the Rotemberg model around a distorted steady state," Economics Letters, Elsevier, vol. 110(2), pages 132-135, February.
    4. Di Bartolomeo Giovanni & Tirelli Patrizio & Acocella Nicola, 2010. "Trend inflation, endogenous mark-ups and the non-vertical Phillips curve," wp.comunite 0065, Department of Communication, University of Teramo.
    5. Tatiana Damjanovic & Charles Nolan, 2009. "Second Order Accurate Approximation to the Rotemberg Model Around a Distorted Steady State," CDMA Working Paper Series 200907, Centre for Dynamic Macroeconomic Analysis, revised 15 Apr 2010.
    6. Basu, Parantap & Sarkar, Agnirup, 2016. "Partial inflation indexation and long-run inflation targeting in a growing economy: A comparison of Calvo and Rotemberg pricing models," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 293-306.
    7. Noriega Antonio E. & Ramos Francia Manuel & Rodríguez-Pérez Cid Alonso, 2015. "Money Demand Estimations in Mexico and of its Stability 1986-2010, as well as Some Examples of its Uses," Working Papers 2015-13, Banco de México.

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