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The Non-Monotonic Relationship Between Seigniorage and Inequality

  • Bhattacharya, Joydeep
  • Bunzel, Helle
  • Haslag, Joseph

Central banks typically find it difficult to turn off the "political pressure valve". This has important consequences for the types of monetary policies they implement. This paper presents 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 nondistortionary 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 is non-monotonic; in particular, the reliance on seigniorage may decrease as income inequality rises above a threshold. We find robust empirical backing for this hypothesis from a cross-section of countries.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10252.

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Date of creation: 01 Mar 2003
Date of revision:
Publication status: Published in Canadian Journal of Economics, May 2005, vol. 38 no. 2, pp. 500-519
Handle: RePEc:isu:genres:10252
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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  1. Easterly, William & Fischer, Stanley, 2000. "Inflation and the poor," Policy Research Working Paper Series 2335, The World Bank.
  2. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
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  6. Casey B. Mulligan & Xavier Sala-i-Martin, 2000. "Extensive Margins and the Demand for Money at Low Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 961-991, October.
  7. Loewy, Michael B., 1988. "Equilibrium policy in an overlapping generations economy," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 485-499.
  8. Stefania Albanesi, . "Inflation and Inequality," Working Papers 199, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. Andrés Erosa & Gustavo Ventura, 2000. "On Inflation as a Regressive Consumption Tax," UWO Department of Economics Working Papers 20001, University of Western Ontario, Department of Economics.
  10. Klaus Deininger & Lyn Squire, 1996. "A New Data Set Measuring Income Inequality," CEMA Working Papers 512, China Economics and Management Academy, Central University of Finance and Economics.
  11. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
  12. Bryant, John & Wallace, Neil, 1984. "A Price Discrimination Analysis of Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 279-88, April.
  13. Joydeep Bhattacharya & Joseph H. Haslag, 2001. "On the Use of the Inflation Tax When Nondistortionary Taxes Are Available," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 823-841, October.
  14. Costas Azariadis & Vincenzo Galasso, 1996. "Discretion, rules and volatility," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 65-74.
  15. Bearse, P. & Glomm, G. & Janeba, E., 2000. "Why poor countries rely mostly on redistribution in-kind," Journal of Public Economics, Elsevier, vol. 75(3), pages 463-481, March.
  16. Alex Cukierman & Sebastian Edwards & Guido Tabellini, 1989. "Seigniorage and Political Instability," NBER Working Papers 3199, National Bureau of Economic Research, Inc.
  17. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
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