Money Demand and Seigniorage-Maximizing Inflation

William Easterly, Paolo Mauro and Klaus Schmidt-Hebbel

Journal of Money, Credit and Banking, 1995, vol. 27, issue 2, 583-603

Abstract: Conventional estimates of the seigniorage-maximizing inflation rate often make use of the Cagan form, which implies a constant semielasticity of money demand with respect to inflation. This paper shows that the elasticity of substitution in transactions between money and bonds determines how the inflation semielasticity of money demand changes as inflation rises. Allowing for a variable semielasticity, estimates of seigniorage-maximizing inflation for a panel of eleven high-inflation countries are lower than those obtained by using the Cagan form. Estimates based on the correct measure of the opportunity cost of money also differ sharply from those obtained when using conventional inflation measures. Copyright 1995 by Ohio State University Press.

Date: 1995
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Working Paper: Money demand and seignorage - maximizing inflation (1992)
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