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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