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Seigniorage-maximizing inflation

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  • Tatiana Damjanovic

    ()

  • Charles Nolan

    ()

Abstract

What is the seigniorage-maximizing level of inflation? Four models formulae for the seigniorage maximizing inflation rate (SMIR) are compared. Two sticky-price models arrive at very different quantitative recommendations although both predict somewhat lower SMIRs than Cagan’s formula and a variant of a .ex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labour market: The Calvo model implies that inflation and output are negatively related and that output is falling in price stickiness whilst the Rotemberg cost-of-price-adjustment model implies exactly the opposite. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the USA and the UK may be quite close to the SMIR.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200807.

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Date of creation: 15 Jul 2008
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Handle: RePEc:san:cdmawp:0807

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Keywords: Price stickiness; Revenue maximizing inflation; Inflation tax; Seigniorage; price dispersion.;

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  1. Tatiana Damjanovic & Charles Nolan, 2010. "Relative Price Distortions and Inflation Persistence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 120(547), pages 1080-1099, 09.
  2. Kimbrough, Kent P., 2006. "Revenue maximizing inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(8), pages 1967-1978, November.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," Departmental Working Papers, Rutgers University, Department of Economics 200105, Rutgers University, Department of Economics.
  4. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  5. Easterly, William & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1992. "Money demand and seignorage - maximizing inflation," Policy Research Working Paper Series 1049, The World Bank.
  6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  7. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 247-274, March.
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Cited by:
  1. Giovanni Di Bartolomeo & Patrizio Tirelli & Nicola Acocella, 2010. "Trend inflation, endogenous mark-ups and the non-vertical Phillips curve," Working Papers, University of Milano-Bicocca, Department of Economics 186, University of Milano-Bicocca, Department of Economics, revised May 2010.
  2. Tatiana Damjanovic & Charles Nolan, 2009. "Second Order Accurate Approximation to the Rotemberg Model Around a Distorted Steady State," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 200907, Centre for Dynamic Macroeconomic Analysis, revised 15 Apr 2010.
  3. Damjanovic, Tatiana & Nolan, Charles, 2011. "Second-order approximation to the Rotemberg model around a distorted steady state," Economics Letters, Elsevier, vol. 110(2), pages 132-135, February.

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