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How Long Can Inflation Tax Compensate For The Loss Of Government Revenue In War Economies? Evidence From Burundi

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Janvier Nkurunziza (Centre for the Study of African Economies)
Abstract

The paper shows that civil war in Burundi in the 1990s has provoked an unprecedented decline in government revenue. Both foreign aid transfers and revenue from domestic sources dried up, inducing the government to rely more on inflation tax. Using quarterly data covering the period from 1980:1 to 2002:4 to measure the sensitivity of money demand to inflation we find that the long-run semi-elasticity of inflation to real money in circulation trebled between the pre-war to the war period. The remarkable increase of the semi-elasticity translates what is known in the literature as economic agents 'flight from domestic currency', a strategy that limits the government's capacity to use inflation tax to compensate for the loss in more traditional revenue sources. Shedding light on the behaviour of the demand for real money amidst persistent political and economic instability, illustrates the limits of using inflation and money creation as a dependable source of government revenue.

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Paper provided by EconWPA in its series Development and Comp Systems with number 0409065.

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Length: 39 pages
Date of creation: 28 Sep 2004
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Handle: RePEc:wpa:wuwpdc:0409065

Note: Type of Document - pdf; pages: 39
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O - Economic Development, Technological Change, and Growth
P - Economic Systems

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