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The Non-Monotonic Relationship Between Seigniorage and Inequality

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  • Bhattacharya, Joydeep
  • Bunzel, Helle
  • Haslag, Joseph

Abstract

Central 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 Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10252.

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Date of creation: 01 Mar 2003
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Publication status: Published in Canadian Journal of Economics, May 2005, vol. 38 no. 2, pp. 500-519
Handle: RePEc:isu:genres:10252

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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  1. Stefania Albanesi, . "Inflation and Inequality," Working Papers 199, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Alex Cukierman & Sebastian Edwards & Guido Tabellini, 1989. "Seigniorage and Political Instability," NBER Working Papers 3199, National Bureau of Economic Research, Inc.
  3. James Bullard & Christopher J. Waller, 2002. "Central bank design in general equilibrium," Working Papers 1998-002, Federal Reserve Bank of St. Louis.
  4. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Finance and the sources of growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125520, Tilburg University.
  5. Joydeep Bhattacharya & Joseph H. Haslag, 2001. "On the Use of the Inflation Tax When Nondistortionary Taxes Are Available," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 823-841, October.
  6. Costas Azariadis & Vincenzo Galasso, 1996. "Discretion, rules and volatility," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 65-74.
  7. Jim Dolmas & Gregory W. Huffman & Mark A. Wynne, 2000. "Inequality, inflation, and central bank independence," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 271-287, February.
  8. Klaus Deininger & Lyn Squire, 1996. "A New Data Set Measuring Income Inequality," CEMA Working Papers 512, China Economics and Management Academy, Central University of Finance and Economics.
  9. Erosa, Andres & Ventura, Gustavo, 2002. "On inflation as a regressive consumption tax," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 761-795, May.
  10. Easterly, William & Fischer, Stanley, 2001. "Inflation and the Poor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 160-78, May.
  11. Bearse, P. & Glomm, G. & Janeba, E., 2000. "Why poor countries rely mostly on redistribution in-kind," Journal of Public Economics, Elsevier, vol. 75(3), pages 463-481, March.
  12. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  13. Casey B. Mulligan & Xavier Sala-i-Martin, 2000. "Extensive Margins and the Demand for Money at Low Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 961-991, October.
  14. Loewy, Michael B., 1988. "Equilibrium policy in an overlapping generations economy," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 485-499.
  15. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  16. Hongyi Li & Lyn Squire & Tao Zhang & Heng-fu Zou, 1999. "A Data Set on Income Distribution," CEMA Working Papers 575, China Economics and Management Academy, Central University of Finance and Economics.
  17. Bryant, John & Wallace, Neil, 1984. "A Price Discrimination Analysis of Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 279-88, April.
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Cited by:
  1. Lahiri, Radhika & Ratnasiri, Shyama, 2010. "A political economy perspective on persistent inequality, inflation, and redistribution," Economic Modelling, Elsevier, vol. 27(5), pages 1199-1210, September.
  2. Scott J. Dressler, 2011. "A Long-Run, Short-Run and Politico-Economic Analysis of the Welfare Costs of Inflation," Villanova School of Business Department of Economics and Statistics Working Paper Series 16, Villanova School of Business Department of Economics and Statistics.
  3. Ari Aisen & Francisco José Veiga, 2005. "The Political Economy of Seigniorage," IMF Working Papers 05/175, International Monetary Fund.
  4. David Aristei & Cristiano Perugini, 2011. "Speed and Sequencing of Transition Reforms and Income Inequality: a Panel Data Analysis," Working Papers 302, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  5. Lahiri, Radhika & Magnani, Elisabetta, 2012. "Endogenous skill heterogeneity and inflation," Economic Modelling, Elsevier, vol. 29(5), pages 1745-1756.

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