The Journal of Economic Studies and Policies

The Journal of Economic Studies and Policies

Inflationary Finance and its Optimal Level: a Theoretical Analysis

Document Type : Original Article

Authors
1 Assistant Professor, Faculty of Islamic Education and Economics, Imam Sadegh University
2 Associate Professor, Faculty of Economics, University of Tehran
Abstract
The paper explains the importance and the incomes of inflationary finance, the maximum income, and the corresponding inflation rate, and the optimal level of application of this instrument.The empirical researches suggest that except for the hyper-inflationary cases, inflationary finance does not play a significant role in financing government expenditures.
The calculation of inflationary finance income and its maximum amount and the corresponding inflation rate has been a concern for economists.  The results of investigations suggest that usually the seigniorage increases with an increase in monetary base and inflation rate.  However, in many studies, maximum income is achieved by a certain rate of inflation.  When the inflation exceeds the certain rate inflationary tax will decrease. Incorporating the welfare costs of inflation in inflationary finance income calculation will yield the optimal inflationary finance.  The study shows that, first, the social cost of seigniorage income, and the tax should be equal.  Secondly, a one percent increase in government income as a fraction of gross domestic product GDP will increase the inflation by 1.8 percent.
Keywords

منابع و مآخذ
1-      Amano.R.A., (1998). "On The Optimal Seigniorage Hypothesis". Journal of Macroeconomics (JMA). Spring, Baton Rouge, Vo1.20
2-      Bally. M..1, (1956), "The Welfare Cost of Inflationary Finance", JPE, Vol. 114
3-      Black. S.W.. (1993), "The New Palgrave Dictionary of Money & Finance"; Macmillan, Vol. 3.
4-      Cagan, P., (1956),"The Monetary Dynamics of Hyperinflation", In "Studies in the Quantity Theory of Money", ed: Milton Friedman,
5-      Carlton. 1) W.,(1982),"The Disruptive Effects of inflation on the Organization of Markets",in: R.E.Halled.,"Inflation: Causes and Effects" University of Chicago Press. Clucaso.11.
6-      Dourribusch,R.S.FischerAR.Sparks,(1998). "Macoeconomics",
7-       7th ed.McGraw Hilt 7-Easterly. W.T.. Paulo Mauro & Klaus Schmidt Ilebbel, (1995), " Money Demand and Seignior age - Maximizing Inflation", JMB, Vol. 27. no.2.
8-        Ficher, S., (1982), "Seigniorage & The Case for a National Money", NE, Vol, 90.
9-       Fischer. Stanley. and Franco Modigliani, (1978) "Toward an Undertanding of the Real Effects and Costs of Inflation". welt wire schaftliches Arch, 114
10-  Friedman. M.. (1971), "Government Revenue From Inflation", JPE .Vol .79
11-  Hall. Robert F.,(1978), "Stochastic Implications of the life sycle permanent Income Hypothesis: Theory and Evidence". JPE. 86,
12-    Hansen. Lars Peter and Kenneth J. Singleton, (1983),"Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns", JPE, 91.
13-  Keynes, J.M., (1924), " Monetary Reform", New York, Harcourt, Brace.
14-   Kimbrough, K.P.. (1986). "The Optimum Quantity of Money Rule in the Theory of Public Finance", JME.
15-  Mankiw. N.G. "The Optimal collection of seigniorage: Theory and Evidence., JME , 20.
16-  Mankiw. N.G., Julio, J. Rotcmbcrg, & L. H. Summers, (1980), " Intertemporal Substitution in Macroeconomics", Quarterly Journal of Economics (QJE), 100.
17-  Marty, A (1.941, "The Inflation Tax and the Marginal Welfare Cost in a World of Currency and Deposits", Federal Reserve Bank of st.Louis, July - Aug.
18-  0kun, Arthur, (1975), "Inflation: Its Mechanics and Welfare Costs" , Brooking papers on Economic Activity, 2.
19-  Potetba, J.M. & J.J. Rotemberg: (1990), "Inflation and Taxation with Optimizing Goverments", JMB, 22.
20-   Rebelo. S., (1991), " Long - Run Policy Analysis and Long - Run Growth", JPE, 99, June.
21-  Tanzi, V., (1978), "Inflation, Real T. Revenue, and the Case for Inflationary Finance:Theory with an Application to Argentina"., IMO Staff Papers, Vol. 25.
22-  Tobin. (ans., (1986)."On the Welfare Macroeconomics of Government Financial Policy", Scandinavian Journal of Economics, 88
Send comment about this article
Enter Name.
Enter a valid email address.
Enter a vaid affiliation.
Enter comments (At leaset 10 words)
CAPTCHA Image
Enter Security Code Correctly.