Inflationary Finance and the Welfare Cost of Inflation
AbstractThis paper applies previous theoretical and empirical results on inflation and demand for money to a study of inflationary finance and the welfare cost of inflation. The amount of revenue generated by a steady inflation is derived as a function of the inflation rate and some underlying parameters. Empirically, the revenue-maximizing rate is on the order of 140 percent per month with the corresponding revenue approximating 15 percent of national income. It is argued that hyper-inflations become unstable when the revenue-maximizing rate is exceeded. Because inflation leads to higher transaction costs (resulting from greater payment frequencies and reduced use of "money" as a payments medium), there is a net social cost attached to inflationary finance. The model implies that marginal collection costs of inflationary finance exceed 50 percent for all positive rates of inflation-hence, alternative means of raising revenue should be socially preferable. The analysis also provides estimates of the social gain from moving to the optimum quantity of money as 1-3 percent of income.
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Bibliographic InfoPaper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3451393.
Date of creation: 1972
Date of revision:
Publication status: Published in Journal of Political Economy -Chicago-
Other versions of this item:
- 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.
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- Stein, Jerome L, 1970. "Monetary Growth Theory in Perspective," American Economic Review, American Economic Association, vol. 60(1), pages 85-106, March.
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- Siffat Mushtaq & Abdul Rashid & Abdul Qayyum, 2012.
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The Pakistan Development Review,
Pakistan Institute of Development Economics, vol. 51(1), pages 61-96.
- Mushtaq, Siffat & Rashid , Abdul & Qayyum , Abdul, 2013. "On the Welfare Cost of Inflation: The Case of Pakistan," MPRA Paper 47549, University Library of Munich, Germany.
- Easterly, William & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1992.
"Money demand and seignorage - maximizing inflation,"
Policy Research Working Paper Series
1049, The World Bank.
- Stella Raleva, 2012. "Cost Push Factors of Bulgarian Inflation (English)," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 58-75.
- Mladenovic, Zorica & Petrovic, Pavle, 2010. "Cagan's paradox and money demand in hyperinflation: Revisited at daily frequency," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1369-1384, November.
- Ferda Halicioglu, 2005. "Active And Passive Seigniorage Revenues: The Case For Turkey 1970-1997," Macroeconomics 0503010, EconWPA.
- Pessoa, Samuel de Abreu, 2000. "Welfare Characterization of Monetary-Applied Models and Three Implications," Economics Working Papers (Ensaios Economicos da EPGE) 378, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
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