Fiscal Revenue, Inflationary Finance and Growth

Nurun Choudhry

No 1992/023, IMF Working Papers from International Monetary Fund

Abstract: This paper analyzes the optimal rate of monetary expansion when government resorts to inflationary finance to generate additional investment for enhancing growth. If there are lags in tax collection, an increase in inflation erodes real fiscal revenue, thereby worsening the current balance while reducing government investment. This impedes capital accumulation as well as increases the welfare cost of inflation. As such, the optimal rate of monetary expansion, equilibrium capital-labor ratio and output are lower while the marginal cost of inflationary finance is higher than they would be without collection lags. Simulations are performed to highlight empirical implications.

Keywords: WP; shadow price; inflation rate; capital formation; inflation revenue; welfare cost of inflation; shadow price of capital; revenue-eroding effect; inflation expectation; effects of inflation; revenue ratio; Monetary expansion; Inflation; Consumption; Government debt management; Capital productivity (search for similar items in EconPapers)
Pages: 30
Date: 1992-03-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1992/023

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