Seigniorage-maximizing inflation

Tatiana Damjanovic () and Charles Nolan

No 2008-35, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: What is the seigniorage-maximizing level of inflation? Four models formulae for the seigniorage maximizing inflation rate (SMIR) are compared. Two sticky-price models arrive at very different quantitative recommendations although both predict somewhat lower SMIRs than Cagan’s formula and a variant of a .ex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labour market: The Calvo model implies that inflation and output are negatively related and that output is falling in price stickiness whilst the Rotemberg cost-of-price-adjustment model implies exactly the opposite. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the USA and the UK may be quite close to the SMIR.

Keywords: Price stickiness; Revenue maximizing inflation; Inflation tax; Seigniorage; price dispersion (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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