IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/1505.html
   My bibliography  Save this paper

Seigniorage, Inflation, and Reputation

Author

Listed:
  • Herschel I. Grossman
  • John B. Van Huyck

Abstract

This paper derives a reputational equilibrum for inflation in a model in which the government obtains valuable seigniorage by issuing fiat money in echange for real resources. One insightful result is that , with contemporaneous perceptionof actual government behavior and immediate adjustment of real cash balences to new information , the Friedman elasticity solution for maximal seigniorage is the reputatoinal equilibrium. More generally , the analysis shows that the objective of maximal seigniorage produces an equilibrium inflation rate equal either to a generalization of the Friedman elasticity solution or to the rate at which the government discounts future seigniorage adjusted for the growth rate, whichever is larger. Thus, the model formalizes the conjecture that epizodes of inflation rates in excess of the Friedman solution are attributable to high discounts rates for future seigniorage. Adding aversion to high expected inflation to the model, this analysis also rationalizes the observation that inflation rates are usually less than Friedman's elasticity solution.

Suggested Citation

  • Herschel I. Grossman & John B. Van Huyck, 1984. "Seigniorage, Inflation, and Reputation," NBER Working Papers 1505, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1505
    Note: ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w1505.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Robert J. Barro, 1983. "Inflationary Finance under Discretion and Rules," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 1-16, February.
    3. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 295-313, April.
    4. 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.
    5. Herschel I. Grossman, 1984. "Counterfactuals, Forecasts, and Choice-Theoretic Modelling of Policy," NBER Working Papers 1381, National Bureau of Economic Research, Inc.
    6. Nichols, Donald A, 1974. "Some Principles of Inflationary Finance," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 423-430, Part I, M.
    7. Friedman, Milton, 1971. "Government Revenue from Inflation," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 846-856, July-Aug..
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Goodfriend, Marvin, 1997. "A framework for the analysis of moderate inflations," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 45-65, June.
    2. Herschel I. Grossman, 1987. "A Generic Model of Monetary Policy, Inflation, and Reputation," NBER Working Papers 2239, National Bureau of Economic Research, Inc.
    3. Maurice Obstfeld, 1989. "Dynamic Seigniorage Theory: An Exploration," NBER Working Papers 2869, National Bureau of Economic Research, Inc.
    4. Grossman, Herschel I., 1991. "Monetary economics : A review essay," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 323-345, October.
    5. Michelle Garfinkel, 2008. "Memorial essays in honor of Herschel I. Grossman: Introduction," Economics of Governance, Springer, vol. 9(1), pages 1-4, January.
    6. Herschel I. Grossman & Suk Jae Noh, 1988. "Proprietary Public Finance, Political Competition, and Reputation," NBER Working Papers 2696, National Bureau of Economic Research, Inc.
    7. Bennett T. McCallum, 1987. "The case for rules in the conduct of monetary policy: a concrete example," Economic Review, Federal Reserve Bank of Richmond, vol. 73(Sep), pages 10-18.
    8. Fuhmei Wang, 2003. "Leakages in dual exchange markets," Prague Economic Papers, Prague University of Economics and Business, vol. 2003(3), pages 249-264.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ferda Halicioglu, 2005. "Active And Passive Seigniorage Revenues: The Case For Turkey 1970-1997," Macroeconomics 0503010, University Library of Munich, Germany.
    2. Thomas Jordan, 2001. "Monetary control uncertainty and inflation bias," Journal of Economics, Springer, vol. 73(2), pages 125-147, June.
    3. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).
    4. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    5. Tahsin SAADI SEDIK, 2003. "Optimal Seigniorage in Developing Countries: An Empirical Investigation," Working Papers 200307, CERDI.
    6. Herschel I. Grossman, 1987. "A Generic Model of Monetary Policy, Inflation, and Reputation," NBER Working Papers 2239, National Bureau of Economic Research, Inc.
    7. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69.
    8. Mats Persson & Torsten Persson & Lars E. O. Svensson, 1998. "Debt, Cash Flow and Inflation Incentives: A Swedish Example," International Economic Association Series, in: Guillermo Calvo & Mervyn King (ed.), The Debt Burden and its Consequences for Monetary Policy, chapter 2, pages 28-66, Palgrave Macmillan.
    9. Gilbert Bougi & Helmi Hamdi, 2007. "La crédibilité de la banque centrale face aux défis de la monnaie électronique," CAE Working Papers 56, Aix-Marseille Université, CERGAM.
    10. David H. Howard, 1987. "Exchange rate regimes and macroeconomic stabilization in a developing country," International Finance Discussion Papers 314, Board of Governors of the Federal Reserve System (U.S.).
    11. Roque B. Fernández, 1991. "What Have Populists Learned from Hyperinflation?," NBER Chapters, in: The Macroeconomics of Populism in Latin America, pages 121-149, National Bureau of Economic Research, Inc.
    12. Van Der Ploeg, F., 1991. "Unanticipated Inflation and Government Finance : The Case for an Independent Common Central Bank," Papers 9115, Tilburg - Center for Economic Research.
    13. Donato Masciandaro, 1995. "Designing a central bank: Social player, monetary agent, or banking agent?," Open Economies Review, Springer, vol. 6(4), pages 399-410, October.
    14. T. Norman Van Cott & Gary J. Santoni, 1976. "Consumption-Based Private To Public Redistribution During Inflation," Public Finance Review, , vol. 4(4), pages 453-464, October.
    15. Masciandaro, Donato, 2022. "Independence, conservatism, and beyond: Monetary policy, central bank governance and central banker preferences (1981–2021)," Journal of International Money and Finance, Elsevier, vol. 122(C).
    16. Jakob De Haan & Jan Egbert Sturm, 1992. "The Case for Central Bank Independence," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 45(182), pages 305-327.
    17. Laetitia Lepetit & Clovis Rugemintwari & Frank Strobel, 2015. "Monetary, Financial and Fiscal Stability in the East African Community: Ready for a Monetary Union?," The World Economy, Wiley Blackwell, vol. 38(8), pages 1179-1204, August.
    18. Guido Tabellini, 2005. "Finn Kydland and Edward Prescott's Contribution to the Theory of Macroeconomic Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 203-216, June.
    19. Huang, Haizhou & Wei, Shang-Jin, 2006. "Monetary policies for developing countries: The role of institutional quality," Journal of International Economics, Elsevier, vol. 70(1), pages 239-252, September.
    20. Andreas Freytag, 2001. "Why Have Some Monetary Reforms Succeeded and Others Not? - An Empirical Assessment," IWP Discussion Paper Series 04/2001, Institute for Economic Policy, Cologne, Germany.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1505. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.