Working Paper: CEPR ID: DP1488
Authors: Mats Persson; Torsten Persson; Lars E. O. Svensson
Abstract: The fiscal gains from, and hence the political incentives for, an increase in the inflation rate of ten percentage points may be substantial: Swedish data from 1994 suggests an annual real flow of 3?4% of GDP, or a capitalized value of nearly 100% of GDP. These gains would have arisen mainly from the nominalistic features of the tax and transfer systems rather than from the traditional sources: seignorage and real depreciation of 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.
Keywords: inflation gains; inflation costs; public debt
JEL Codes: E31; E62; H62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation rate increase (E31) | fiscal gains (E62) |
| inflation rate increase (E31) | government revenue (H27) |
| inflation rate increase (E31) | real value of public debt (H63) |
| inflation rate increase (E31) | social costs (J32) |
| high inflation vs low inflation (E31) | fiscal gains (E62) |