Working Paper: NBER ID: w2528
Authors: Willem H. Buiter
Abstract: The paper uses a demand for seigniorage revenue and supply of seigniorage revenue approach to determine the consequences 0 cots in public spending for the rate of inflation. Monetary financing is viewed as the residual financing mode, with tax rates and pubic debt-GDP ratios held constant. In a small open economy with an exogenous real interest rate, cuts n public consumption spending will lower the inflation rate n the revenue-efficient region of the seigniorage Laffer curve. When there are cuts in public sector capital formation , the inflation rate ran rise even in the seigniorage-efficient region. This sill be the case if the expenditure effect which reduces the deficit one-for-one) is more than offset by direct and indirect revenue effects (which raise the deficit) and by an adverse money demand effect. When the real interest rate is endogenous, the scope for inflation-increasing public spending cuts is enhanced.
Keywords: Public Spending; Inflation; Seigniorage
JEL Codes: E31; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cuts in public consumption spending (H69) | Reduction in inflation rate (E31) |
| Cuts in public sector capital formation (H54) | Increase in inflation rate (E31) |
| Expenditure effect (D12) | Reduction in deficit (H62) |
| Direct revenue effect + Indirect revenue effect (H29) | Increase in deficit (H69) |
| Public spending cuts (endogenous real interest rate) (E43) | Potential for inflation-increasing effects (E31) |