IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpdc/0409065.html
   My bibliography  Save this paper

How Long Can Inflation Tax Compensate For The Loss Of Government Revenue In War Economies? Evidence From Burundi

Author

Listed:
  • Janvier Nkurunziza

    (Centre for the Study of African Economies)

Abstract

The paper shows that civil war in Burundi in the 1990s has provoked an unprecedented decline in government revenue. Both foreign aid transfers and revenue from domestic sources dried up, inducing the government to rely more on inflation tax. Using quarterly data covering the period from 1980:1 to 2002:4 to measure the sensitivity of money demand to inflation we find that the long-run semi-elasticity of inflation to real money in circulation trebled between the pre-war to the war period. The remarkable increase of the semi-elasticity translates what is known in the literature as economic agents 'flight from domestic currency', a strategy that limits the government's capacity to use inflation tax to compensate for the loss in more traditional revenue sources. Shedding light on the behaviour of the demand for real money amidst persistent political and economic instability, illustrates the limits of using inflation and money creation as a dependable source of government revenue.

Suggested Citation

  • Janvier Nkurunziza, 2004. "How Long Can Inflation Tax Compensate For The Loss Of Government Revenue In War Economies? Evidence From Burundi," Development and Comp Systems 0409065, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpdc:0409065
    Note: Type of Document - pdf; pages: 39
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/dev/papers/0409/0409065.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jan Willem Gunning & Paul Collier, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March.
    2. William Easterly & Ross Levine, 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1203-1250.
    3. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    4. Paul Collier & Anke Hoeffler & Måns Söderbom, 2004. "On the Duration of Civil War," Journal of Peace Research, Peace Research Institute Oslo, vol. 41(3), pages 253-273, May.
    5. Adam, Christopher, 1999. "Financial Liberalisation and Currency Demand in Zambia," Journal of African Economies, Centre for the Study of African Economies, vol. 8(3), pages 268-306, October.
    6. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356, Elsevier.
    7. Ferree, Karen & Singh, Smita & Bates, Robert, 1997. "Political Institutions And Economic Growth In Africa," Harvard Institute for International Development (HIID) Papers 294403, Harvard University, Kennedy School of Government.
    8. Rudiger Dornbusch & Daniel Valente Dantas & Clarice Pechman & Roberto de Rezende Rocha & Demetrio SimÅes, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 25-40.
    9. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    10. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 583-603, May.
    11. Donald W. K. Andrews, 2003. "Tests for Parameter Instability and Structural Change with Unknown Change Point: A Corrigendum," Econometrica, Econometric Society, vol. 71(1), pages 395-397, January.
    12. Janvier D. Nkurunziza & Floribert Ngaruko, 2002. "Explaining growth in Burundi: 1960-2000," CSAE Working Paper Series 2002-03, Centre for the Study of African Economies, University of Oxford.
    13. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    14. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-374, June.
    15. Ashworth, John & Evans, Lynne & Teriba, Ayo, 1999. "Structural breaks in parallel markets?: the case of Nigeria, 1980-1993," Journal of Development Economics, Elsevier, vol. 58(1), pages 255-264, February.
    16. Léonce Ndikumana, 2001. "Fiscal Policy, Conflict, and Reconstruction in Burundi and Rwanda," WIDER Working Paper Series DP2001-62, World Institute for Development Economic Research (UNU-WIDER).
    17. Janvier Nkurunziza & Floribert Ngaruko, 2002. "Explaining Growth in Burundi: 1960-2000," Economics Series Working Papers WPS/2002-03, University of Oxford, Department of Economics.
    18. Abdiweli Ali, 2001. "Political instability, policy uncertainty, and economic growth: An empirical investigation," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 29(1), pages 87-106, March.
    19. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    20. Pierre-Richard Agénor & Mark P. Taylor, 1992. "Testing for Credibility Effects," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 545-571, September.
    21. Guillermo A. Calvo & Pablo E. Guidotti, 1993. "On the Flexibility of Monetary Policy: The Case of the Optimal Inflation Tax," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 667-687.
    22. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    23. Randa, John, 1999. "Economic Reform and the Stability of the Demand for Money in Tanzania," Journal of African Economies, Centre for the Study of African Economies, vol. 8(3), pages 307-344, October.
    24. Sebastian Edwards & Guido Tabellini, 1991. "Political Instability, Political Weakness and Inflation: An Empirical Analysis," NBER Working Papers 3721, National Bureau of Economic Research, Inc.
    25. Perron, P, 1993. "Erratum [The Great Crash, the Oil Price Shock and the Unit Root Hypothesis]," Econometrica, Econometric Society, vol. 61(1), pages 248-249, January.
    26. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
    27. Brzoska, Michael, 1995. "World military expenditures," Handbook of Defense Economics, in: Keith Hartley & Todd Sandler (ed.), Handbook of Defense Economics, edition 1, volume 1, chapter 3, pages 45-67, Elsevier.
    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. repec:idq:ictduk:13551 is not listed on IDEAS
    2. Vanessa van den Boogaard & Wilson Prichard & Nikola Milicic & Matthew Benson, 2016. "Tax revenue mobilization in conflict-affected developing countries," WIDER Working Paper Series 155, World Institute for Development Economic Research (UNU-WIDER).
    3. Arcade NDORICIMPA, 2017. "Analysis of Asymmetries in the Tax-Spending Nexus in Burundi," Journal of Economics and Political Economy, KSP Journals, vol. 4(1), pages 53-70, March.
    4. Vanessa van den Boogaard & Wilson Prichard & Nikola Milicic & Matthew Benson, 2016. "Tax revenue mobilization in conflict-affected developing countries," WIDER Working Paper Series wp-2016-155, World Institute for Development Economic Research (UNU-WIDER).

    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. Janvier Nkurunziza, 2004. "How long can inflation tax compensate for the loss Wof government revenue in war economics? Evidence from Burundi," Economics Series Working Papers WPS/2004-19, University of Oxford, Department of Economics.
    2. Giorgio Canarella & Rangan Gupta & Stephen M. Miller & Stephen K. Pollard, 2019. "Unemployment rate hysteresis and the great recession: exploring the metropolitan evidence," Empirical Economics, Springer, vol. 56(1), pages 61-79, January.
    3. Remzi Uctum, 2007. "Économétrie des modèles à changement de régimes : un essai de synthèse," L'Actualité Economique, Société Canadienne de Science Economique, vol. 83(4), pages 447-482.
    4. Jouini, Jamel & Boutahar, Mohamed, 2005. "Evidence on structural changes in U.S. time series," Economic Modelling, Elsevier, vol. 22(3), pages 391-422, May.
    5. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2014. "Causality and contagion in EMU sovereign debt markets," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 12-27.
    6. Kuikeu, Oscar, 2011. "Arguments contre la zone franc [Against the cfa franc zone]," MPRA Paper 33710, University Library of Munich, Germany.
    7. Nidhal Mgadmi & Houssem Rachdi & Hichem Saidi & Khaled Guesmi, 2019. "On the Instability of Tunisian Money Demand: Some Empirical Issues with Structural Breaks," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(1), pages 153-165, March.
    8. Marriott, John & Newbold, Paul, 2000. "The strength of evidence for unit autoregressive roots and structural breaks: A Bayesian perspective," Journal of Econometrics, Elsevier, vol. 98(1), pages 1-25, September.
    9. Cuddington, John T. & Ludema, Rodney & Jayasuriya, Shamila A, 2002. "Prebisch-Singer Redux," Working Papers 15857, United States International Trade Commission, Office of Economics.
    10. Antonio E. Noriega & Araceli Ramírez-Zamora, 1999. "Unit roots and multiple structural breaks in real output," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 14(2), pages 163-188.
    11. Jeng-Bau Lin & Chin-Chia Liang & Wei Tsai, 2019. "Nonlinear Relationships between Oil Prices and Implied Volatilities: Providing More Valuable Information," Sustainability, MDPI, vol. 11(14), pages 1-15, July.
    12. Cunado, J. & Perez de Gracia, F., 2006. "Real convergence in Africa in the second-half of the 20th century," Journal of Economics and Business, Elsevier, vol. 58(2), pages 153-167.
    13. Choi, Kyongwook & Yu, Wei-Choun & Zivot, Eric, 2010. "Long memory versus structural breaks in modeling and forecasting realized volatility," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 857-875, September.
    14. Atanu Ghoshray & Issam Malki & Javier Ordóñez, 2022. "On the long-run dynamics of income and wealth inequality," Empirical Economics, Springer, vol. 62(2), pages 375-408, February.
    15. De Wachter, Stefan & Tzavalis, Elias, 2012. "Detection of structural breaks in linear dynamic panel data models," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3020-3034.
    16. Rómulo Chumacero & Jorge Quiroz, 1996. "La Tasa Natural de Crecimiento de la Economía Chilena: 1985-1996," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 33(100), pages 453-472.
    17. Wang‐Sheng Lee & Sandy Suardi, 2010. "The Australian Firearms Buyback And Its Effect On Gun Deaths," Contemporary Economic Policy, Western Economic Association International, vol. 28(1), pages 65-79, January.
    18. Miguel Arranz & Alvaro Escribano, 2004. "Outliers - robust ECM cointegration tests based on the trend components," Spanish Economic Review, Springer;Spanish Economic Association, vol. 6(4), pages 243-266, December.
    19. Jim Lee, 1999. "Inflation Targeting In Practice: Further Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 17(3), pages 332-347, July.
    20. Kuan, Chung-Ming, 1998. "Tests for changes in models with a polynomial trend," Journal of Econometrics, Elsevier, vol. 84(1), pages 75-91, May.

    More about this item

    JEL classification:

    • O - Economic Development, Innovation, Technological Change, and Growth
    • P - Political Economy and Comparative Economic Systems

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:wpa:wuwpdc:0409065. See general information about how to correct material in RePEc.

    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: EconWPA The email address of this maintainer does not seem to be valid anymore. Please ask EconWPA to update the entry or send us the correct address (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.