The non-monotonic relationship between seigniorage and inequality
We present 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 non-distortionary 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 may be non-monotonic. We find robust empirical backing for this hypothesis from a cross-section of countries.
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Volume (Year): 38 (2005)
Issue (Month): 2 (May)
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