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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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, University of Chicago Press, vol. 80(5), pages 978-1001, Sept.-Oct.
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.:
- Friedman, Milton, 1971. "Government Revenue from Inflation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 79(4), pages 846-56, July-Aug..
- Stein, Jerome L, 1970. "Monetary Growth Theory in Perspective," American Economic Review, American Economic Association, American Economic Association, vol. 60(1), pages 85-106, March.
- Feige, Edgar L & Parkin, Michael, 1971. "The Optimal Quantity of Money, Bonds, Commodity Inventories, and Capital," American Economic Review, American Economic Association, American Economic Association, vol. 61(3), pages 335-49, June.
- Pessoa, Samuel de Abreu, 2000. "Welfare Characterization of Monetary-Applied Models and Three Implications," Economics Working Papers (Ensaios Economicos da EPGE), FGV/EPGE Escola Brasileira de Economia e FinanÃ§as, Getulio Vargas Foundation (Brazil) 378, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Siffat Mushtaq & Abdul Rashid & Abdul Qayyum, 2012.
"On the Welfare Cost of Inflation: The Case of Pakistan,"
The Pakistan Development Review, Pakistan Institute of Development Economics,
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, University Library of Munich, Germany 47549, University Library of Munich, Germany.
- Ferda Halicioglu, 2005. "Active And Passive Seigniorage Revenues: The Case For Turkey 1970-1997," Macroeconomics, EconWPA 0503010, EconWPA.
- Mladenovic, Zorica & Petrovic, Pavle, 2010. "Cagan's paradox and money demand in hyperinflation: Revisited at daily frequency," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(7), pages 1369-1384, November.
- Stella Raleva, 2012. "Cost Push Factors of Bulgarian Inflation (Bulgarian)," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 37-57.
- Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995.
"Money Demand and Seigniorage-Maximizing Inflation,"
Journal of Money, Credit and Banking, Blackwell Publishing,
Blackwell Publishing, vol. 27(2), pages 583-603, May.
- Easterly, William & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1992. "Money demand and seignorage - maximizing inflation," Policy Research Working Paper Series, The World Bank 1049, The World Bank.
- Stella Raleva, 2012. "Cost Push Factors of Bulgarian Inflation (English)," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 58-75.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ben Steinberg).
If references are entirely missing, you can add them using this form.