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Seigniorage and tax smoothing in the United States: 1914-1986

  • Carl E. Walsh
  • Bharat Trehan

Models in which fiscal and monetary authorities cooperate to minimize the distortionary costs of raising revenue to finance an exogenous stream of government expenditures are shown to have implications for the long-run relationships between government expenditures, tax revenues and seigniorage. First, tax and seigniorage revenue should be cointegrated. Second, the cointegrating vector linking taxes and seigniorage should be only one of the cointegrating vectors linking expenditures, tax revenues and seigniorage. Third, the deficit net-of-interest should be nonstationary. These implications are tested using annual U.S. data from the period 1914 to 1986. The data reject all three implications of the theory.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 88-05.

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Date of creation: 1988
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Handle: RePEc:fip:fedfap:88-05
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