Working Paper: NBER ID: w2413
Authors: Michael Bruno; Stanley Fischer
Abstract: 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.
Keywords: Seigniorage; Inflation Equilibria; Monetary Policy; Fiscal Policy
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government deficit financing (H68) | inflation rates (E31) |
| rational expectations (D84) | high inflation equilibrium stability (E31) |
| rational expectations (D84) | low inflation equilibrium instability (E31) |
| adaptive expectations (D84) | low inflation equilibrium stability (E31) |
| government nominal anchor (E63) | disappearance of equilibria (D59) |