Seigniorage and the welfare cost of inflation. Evidence from an intertemporal model of money and consumption

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Abstract

This paper empirically investigates the restrictions embodied in a Sidrauski-type model for the cross-relations between consumption, money holdings, inflation, and assets' returns using quarterly data for the high-inflation economy in Israel, 1970-1988. Using a set of the estimated parameters it is shown that the model's implications for seigniorage are quite different than those from a Cagan-type model. That is, while the model is able to account for the observed stability of the seigniorage-GNP ratio, a Cagan-type model predicts a Laffer curve for seigniorage. The estimates also imply sizeable welfare costs of inflation.

Original languageEnglish
Pages (from-to)389-410
Number of pages22
JournalJournal of Monetary Economics
Volume29
Issue number3
DOIs
StatePublished - Jun 1992

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