Working Paper: NBER ID: w1505
Authors: 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.
Keywords: seigniorage; inflation; reputation; monetary policy
JEL Codes: E31; E42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government actions (such as issuing fiat money) (E42) | Public expectations of inflation (E31) |
| Public expectations of inflation (E31) | Actual inflation rate (E31) |
| Government actions (such as issuing fiat money) (E42) | Actual inflation rate (E31) |
| Higher discount rates for future seigniorage (E43) | Immediate inflationary pressures (E31) |
| Immediate inflationary pressures (E31) | Future perceptions of seigniorage (E49) |
| Government acts myopically (E65) | Higher inflation rates in the future (E31) |