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Seigniorage and the welfare cost of inflation: evidence from an intertemporal model of money and consumption

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Author Info
Zvi Eckstein
Leonardo Leiderman

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Abstract

This paper empirically investigates the restrictions embodied in a popular dynamic monetary model for the cross relations between consumption, money holdings, inflation and assets’ returns using quarterly data for the high-inflation economy in Israel, 1970–1988. The model considered includes money in agents’ utility function. A set of the estimated parameters is used in the analysis to assess the model’s quantitative implications for seigniorage and for the welfare costs of inflation. The estimates are found to account well for the observed stability over time of seigniorage in Israel and imply sizeable welfare costs of inflation.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 40.

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Date of creation: 1991
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Handle: RePEc:fip:fedmem:40

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Keywords: Inflation (Finance) ; Money;

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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. McCallum, Bennett T., 1990. "Inflation: Theory and evidence," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 18, pages 963-1012 Elsevier. [Downloadable!] (restricted)
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  2. Lucas, Robert E., 1981. "Discussion of : Stanley Fischer, "towards an understanding of the costs of inflation: II"," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 43-52, January. [Downloadable!] (restricted)
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  4. King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January. [Downloadable!] (restricted)
  5. Finn, M.G. & Hoffman, D.L. & Schlagenhauf, D.E., 1988. "Intertemporal Asset-Pricing Relationships In Barter And Monetary Economies: An Empirical Analysis," UWO Department of Economics Working Papers 8805, University of Western Ontario, Department of Economics.
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  6. Eichenbaum, Martin S & Hansen, Lars Peter & Singleton, Kenneth J, 1988. "A Time Series Analysis of Representative Agent Models of Consumption and Leisure Choice under Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 51-78, February. [Downloadable!] (restricted)
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  7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  8. 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)
  9. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March. [Downloadable!] (restricted)
  10. Bental, Benjamin & Eckstein, Zvi, 1990. "The Dynamics of Inflation with Constant Deficit under Expected Regime Change," Economic Journal, Royal Economic Society, vol. 100(403), pages 1245-60, December. [Downloadable!] (restricted)
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  11. Sargent, Thomas J & Wallace, Neil, 1973. "Rational Expectations and the Dynamics of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 328-50, June. [Downloadable!] (restricted)
  12. Drazen, Allan & Helpman, Elhanan, 1990. "Inflationary Consequences of Anticipated Macroeconomic Policies," Review of Economic Studies, Blackwell Publishing, vol. 57(1), pages 147-64, January. [Downloadable!] (restricted)
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  13. Cooley, T.F. & Hansen, G.D., 1991. "Tax Distortions in a Neoclassical Monetary Economy," RCER Working Papers 265, University of Rochester - Center for Economic Research (RCER).
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  14. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September. [Downloadable!] (restricted)
  15. Singleton, Kenneth J., 1985. "Testing specifications of economic agents' intertemporal optimum problems in the presence of alternative models," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 391-413. [Downloadable!] (restricted)
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(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. Óscar J. Arce, 2006. "Speculative hyperinflations: when can we rule them out?," Banco de España Working Papers 0607, Banco de España. [Downloadable!]
  2. Arby, M. Farooq, 2006. "Seigniorage Earnings of Commercial Banks and State Bank of Pakistan," MPRA Paper 4955, University Library of Munich, Germany. [Downloadable!]
  3. Sergey Pekarski, 2007. "Budget deficits and inflation feedback," Working Papers WP13_2007_12, Laboratory for Macroeconomic Analysis. [Downloadable!]
  4. Reinhart, Carmen & Vegh, Carlos, 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," MPRA Paper 13898, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  5. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany. [Downloadable!]
  6. Gillman, Max & Cziráky, Dario, 2005. "Money Demand in an EU Accession Country: A VECM Study of Croatia," Cardiff Economics Working Papers E2005/7, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
    Other versions:
  7. Guillermo Calvo & Oya Celasun & Michael Kumhof, 2003. "Inflation Inertia and Credible Disinflation - The Open Economy Case," NBER Working Papers 9557, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Gillman, Max & Kejak, Michal, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Cardiff Economics Working Papers E2005/15, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
    Other versions:
  9. Gillman, Max & Nakov, Anton, 2005. "Granger Causality of the Inflation-Growth Mirror in Accession Countries," CEPR Discussion Papers 4845, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. O'Reilly, B., 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada. [Downloadable!]
  11. Michael Kumhof, 2001. "A Critical View of Inflation Targeting: Crises, Limited Sustainability, and Aggregate Shocks," Working Papers Central Bank of Chile 127, Central Bank of Chile. [Downloadable!]
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  12. Laurence Ball, 1993. "The Dynamics of High Inflation," NBER Working Papers 4578, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Oscar J. Arce, 2006. "Speculative Hyperinflations: When Can We Rule Them Out?," Computing in Economics and Finance 2006 376, Society for Computational Economics. [Downloadable!]
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