The Non-Monotonic Relationship Between Seigniorage and Inequality
AbstractCentral banks typically find it difficult to turn off the "political pressure valve". This has important consequences for the types of monetary policies they implement. This paper presents an analysis of how political factors may come into play in the equilibrium determination of inflation. We employ a standard overlapping generations model with heterogenous young-age endowments, and a government that funds an exogenous spending via a combination of nondistortionary income taxes and the inflation tax. Agents have access to two stores of value: fiat money and an inflation-shielded, yet costly, asset. The model predicts that the relationship between elected reliance on the inflation tax (for revenue) and income inequality is non-monotonic; in particular, the reliance on seigniorage may decrease as income inequality rises above a threshold. We find robust empirical backing for this hypothesis from a cross-section of countries.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10252.
Date of creation: 01 Mar 2003
Date of revision:
Publication status: Published in Canadian Journal of Economics, May 2005, vol. 38 no. 2, pp. 500-519
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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Other versions of this item:
- Joydeep Bhattacharya & Helle Bunzel & Joseph Haslag, 2005. "The non-monotonic relationship between seigniorage and inequality," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 500-519, May.
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
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