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Seigniorage, Taxation, and Weak Government

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  • Andrabi, Tahir

Abstract

We examined a setting where decision making about financing a given amount of government spending is decentralized. Seigniorage is the residual tax that passively adjusts to meet the budget constraint. We place this budget making process in a repeated game setting and characterize the cooperative tax-seigniorage function. Three main results are (1) Seignioiage and transitory changes in output are positively correlated. This result holds after controlling for changes in government spending. (2) A positive (negative) covariation between current period government spending and transitory output strengthens (weakens) the positive relationship between seigniorage and transitory output. (3) Seigniorage is negatively correlated with trend output growth. Time series empirical tests using annual data for 20 OECD countries support the first two results. A test using cross-section data on 75 countries confirms the third hypothesis. Copyright 1997 by Ohio State University Press.

Suggested Citation

  • Andrabi, Tahir, 1997. "Seigniorage, Taxation, and Weak Government," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 106-126, February.
  • Handle: RePEc:mcb:jmoncb:v:29:y:1997:i:1:p:106-26
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    Cited by:

    1. Guillaume Cheikbossian, 2001. "When a Monetary Union Fails: A Parable," Open Economies Review, Springer, vol. 12(2), pages 181-195, April.
    2. Hakan Berument, 1997. "Financing divided governments," Applied Economics Letters, Taylor & Francis Journals, vol. 4(6), pages 369-372.
    3. Crettez, Bertrand & Michel, Philippe & Wigniolle, Bertrand, 2002. "Seigniorage and public good in an OLG model with cash-in-advance constraints," Research in Economics, Elsevier, vol. 56(4), pages 333-364, December.

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