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Money Demand and Seigniorage-Maximizing Inflation

  • Easterly, William R
  • Mauro, Paolo
  • Schmidt-Hebbel, Klaus

Conventional estimates of the seigniorage-maximizing inflation rate often make use of the Cagan form, which implies a constant semielasticity of money demand with respect to inflation. This paper shows that the elasticity of substitution in transactions between money and bonds determines how the inflation semielasticity of money demand changes as inflation rises. Allowing for a variable semielasticity, estimates of seigniorage-maximizing inflation for a panel of eleven high-inflation countries are lower than those obtained by using the Cagan form. Estimates based on the correct measure of the opportunity cost of money also differ sharply from those obtained when using conventional inflation measures. Copyright 1995 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 27 (1995)
Issue (Month): 2 (May)
Pages: 583-603

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Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:2:p:583-603
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  1. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, vol. 46(2), pages 317-340, April.
  2. Rudiger Dornbusch & Stanley Fischer, 1991. "Moderate Inflation," NBER Working Papers 3896, National Bureau of Economic Research, Inc.
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  9. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
  10. Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping hyperinflations past and present," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 122(1), pages 1-47, March.
  11. Bruno, Michael & Fischer, Stanley, 1990. "Seigniorage, Operating Rules, and the High Inflation Trap," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 353-74, May.
  12. Barro, Robert J, 1972. "Inflationary Finance and the Welfare Cost of Inflation," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 978-1001, Sept.-Oct.
  13. Carl E. Walsh, 1984. "Optimal Taxation by the Monetary Authority," NBER Working Papers 1375, National Bureau of Economic Research, Inc.
  14. Bhargava, A & Franzini, L & Narendranathan, W, 1982. "Serial Correlation and the Fixed Effects Model," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 533-49, October.
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