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The Competitive Externalities and the Optimal Seignorage

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  • Joshua Aizenman

Abstract

The purpose of this study is to analyze the behavior of the inflation tax in an economy where, due to coordination failure, the inflation rate is not determined by a unique policy maker but by several competing decision makers. Each decision maker can effectively print more paper money via the central bank, which operates only as the printing agency of nominal balances. This market structure generates a competitive externality. A key result is that the optimal' inflation rate depends positively on the competitive externality. We provide two examples of scenarios where these externalities are relevant. First, the case in which the central bank is a powerless agent whose only responsibility is to print money upon demand by the ministers. The second example is a common currency area, where several countries operate in a monetary union. Alternatively, this may be the case of a country composed of several states or provinces, where the centralized government system is weak and local governments can use seigniorage to their advantage. The effect of competitive externalities is to increase the inflation rate, to an extent that puts the economy on the wrong side of the inflation tax Laffer curve.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2937.

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Date of creation: Apr 1989
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Publication status: published as Journal of Money, Credit and Banking, Vol. 24, No. 1, pp. 61-71, (February 1992).
Handle: RePEc:nbr:nberwo:2937

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  1. Cukierman, Alex, 1988. "Rapid inflation -- deliberate policy or miscalculation?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 11-75.
  2. Obstfeld, Maurice, 1984. "Multiple Stable Equilibria in an Optimizing Perfect-Foresight Model," Econometrica, Econometric Society, vol. 52(1), pages 223-28, January.
  3. Alessandra Casella & Jonathan Feinstein, 1988. "Management of a Common Currency," NBER Working Papers 2740, National Bureau of Economic Research, Inc.
  4. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
  5. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 295-313, April.
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Cited by:
  1. Rama, Martin, 1998. "Wage misalignment in CFA countries: are labor market policies to blame?," Policy Research Working Paper Series 1873, The World Bank.
  2. Ivan Werning & Emmanuel Farhi, 2012. "Fiscal Unions," NBER Working Papers 18280, National Bureau of Economic Research, Inc.
  3. Sebastian Edwards, 1993. "The Political Economy of Infaliton and Stabilization in Developing Countries," NBER Working Papers 4319, National Bureau of Economic Research, Inc.
  4. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January.
  5. Cukierman, A., 1996. "The Economics of Central Banking," Discussion Paper 1996-31, Tilburg University, Center for Economic Research.

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