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Seigniorage, Operating Rules and the High Inflation Trap


  • Michael Bruno
  • Stanley Fischer


A given amount of seigniorage revenue can be collected at either a high or a low rate of inflation. Thus there ray be two equilibria when a government finances its deficit by printing money--implying that an economy may be stuck in a high inflation equilibrium when, with the same fiscal policy, it could be at a lower inflation rate. We show that under rational expectations the high inflation equilibrium is stable and the low inflation equilibrium unstable; under adaptive expectations or lagged adjustment of money balances with rational expectations, it may be the low inflation equilibrium that is stable. Extending the model to allow for bond as well as money financing of deficits, we show that one of the equilibria disappears if the government sets a nominal anchor for the economy, for instance by fixing the growth rate of money. The dual equilibria and their stability.

Suggested Citation

  • Michael Bruno & Stanley Fischer, 1987. "Seigniorage, Operating Rules and the High Inflation Trap," NBER Working Papers 2413, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2413
    Note: EFG

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    Cited by:

    1. Gottlieb, Daniel, 1990. "Inflation and Policy Response - The Israeli Case: 1970-1989," MPRA Paper 4114, University Library of Munich, Germany.
    2. Szybisz, Martín A. & Szybisz, Leszek, 2017. "Extended nonlinear feedback model for describing episodes of high inflation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 465(C), pages 91-108.
    3. Coricelli, Fabrizio & Rocha, Roberto de Rezende, 1991. "Stabilization programs in Eastern Europe : a comparative analysis of the Polish and Yugoslav programs of 1990," Policy Research Working Paper Series 732, The World Bank.

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