Working Paper: CEPR ID: DP519
Authors: Maurice Obstfeld
Abstract: This paper develops a dynamic model of seigniorage in which economies' equilibrium paths reflect the ongoing strategic interaction between an optimizing government and a rational public. The model extends existing positive models of monetary policy and inflation by explicitly incorporating the intertemporal linkages among budget deficits, debt and inflation. A central finding is that the public's rational responses to government policies may well create incentives for the government to reduce inflation and the public debt over time. A sufficiently myopic government may, however, provoke a rising equilibrium path of inflation and public debt.
Keywords: seigniorage; dynamic games; time consistency; markov perfect equilibrium
JEL Codes: 134; 321
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public responses (H49) | government reduces inflation (E64) |
| public responses (H49) | government reduces public debt (H63) |
| government behavior (H10) | rising equilibrium path of inflation (E31) |
| government behavior (H10) | rising equilibrium path of public debt (H63) |
| government discount rates (E43) | inflation outcomes (E31) |