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Debt, cash flow and inflation incentives: A Swedish example

  • Persson, Mats


    (Institute for International Economic Studies, Stockholm University)

  • Persson, Torsten


    (Institute for International Economic Studies, Stockholm University)

  • Svensson, Lars E.O.


    (Institute for International Economic Studies, Stockholm University)

The fiscal gains from, and hence the political incentives to, an increase in inflation rate of ten percentage points may be substantial: with Swedish data from 1994, these gains would have been an annual real flow of 3-4 percent of GDP, or a capitalized value of nearly 100 percent of GDP. They would mainly have arisen from the nominalistic features of the tax and transfer systems rather than from the traditional sources: seignorage and real depreciation of the public debt. The welfare costs of such an inflation increase would have been even larger, however, and would thus have reduced net welfare. Possible institutional reforms, aimed at making the political costs of inflation more equal to the social costs, are presented and discussed

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 613.

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Length: 41 pages
Date of creation: 06 Nov 1997
Date of revision:
Publication status: Published in The Debt Burden and its Consequences for Monetary Policy, Calvo, G., King, M. (eds.), 1998, chapter ;, MacMillan, London and St. Martin's Press, New York.
Handle: RePEc:hhs:iiessp:0613
Contact details of provider: Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page:

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  1. Alberto Alesina & Alessandro Prati & Guido Tabellini, 1989. "Public Confidence and Debt Management: A Model and A Case Study of Italy," NBER Working Papers 3135, National Bureau of Economic Research, Inc.
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  4. Giavazzi, Francesco & Pagano, Marco, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," CEPR Discussion Papers 417, C.E.P.R. Discussion Papers.
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  16. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  17. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
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