Working Paper: NBER ID: w5772
Authors: Mats Persson; Torsten Persson; Lars E. O. Svensson
Abstract: The fiscal gains from, and hence the political incentives to, an increase in inflation rate of ten percentage points may be substantial: with Swedish data from 1994, these gains would have been an annual real flow of 3-4 percent of GDP, or a capitalized value of nearly 100 percent of GDP. They would mainly have arisen from the nominalistic features of the tax and transfer systems rather than from the traditional sources: seignorage and real depreciation of the 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
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in inflation rate (E31) | substantial fiscal gains (E62) |
| increase in inflation rate (E31) | reduction in real value of government debt (H63) |
| political incentives to increase inflation (E31) | net reduction in social welfare (H53) |
| political costs of inflation (E31) | higher inflation policies (E64) |