Seigniorage, Operating Rules and the High Inflation Trap

38 Pages Posted: 29 Jun 2004 Last revised: 7 Aug 2022

See all articles by Michael Bruno

Michael Bruno

Hebrew University (Deceased)

Stanley Fischer

Bank of Israel; National Bureau of Economic Research (NBER); International Monetary Fund (IMF)

Date Written: October 1987

Abstract

A given amount of seigniorage revenue can be collected at either a high or a low rate of inflation. Thus there ray be two equilibria when a government finances its deficit by printing money--implying that an economy may be stuck in a high inflation equilibrium when, with the same fiscal policy, it could be at a lower inflation rate. We show that under rational expectations the high inflation equilibrium is stable and the low inflation equilibrium unstable; under adaptive expectations or lagged adjustment of money balances with rational expectations, it may be the low inflation equilibrium that is stable. Extending the model to allow for bond as well as money financing of deficits, we show that one of the equilibria disappears if the government sets a nominal anchor for the economy, for instance by fixing the growth rate of money. The dual equilibria and their stability.

Suggested Citation

Bruno, Michael and Fischer, Stanley, Seigniorage, Operating Rules and the High Inflation Trap (October 1987). NBER Working Paper No. w2413, Available at SSRN: https://ssrn.com/abstract=227109

Michael Bruno

Hebrew University (Deceased)

Stanley Fischer (Contact Author)

Bank of Israel ( email )

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Israel

National Bureau of Economic Research (NBER)

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International Monetary Fund (IMF) ( email )

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