Bovemberg A. L. and O. Evans. 1989. “National and Personal Saving in the United States: Measurement and Analysis of Recent Trends,” IMF Working Paper No. 89/99, December.
Calvo, G. 1987. “Balance of Payments Crises in a Cash-in-Advance Economy,” Journal of Money, Credit and Banking, Vol. 19, pp. 19–32.
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Obstfeld, M. and A. Stockman. 1985. “Exchange Rate Dynamics”, in Handbook of International Economics. Vol. 2; R. W. Jones and P.B. Kenen (eds.). Elsevier Science Publishers B.V., Amsterdam.
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I am grateful to William E. Alexander, Uwe Corsepius, Carlo Cottarelli, Socorro Heysen, and Miguel Savastano for helpful comments. All remaining errors are my sole responsibility.
See for example Tanzi et al. (1988) and the references contained therein for a general discussion on the subject; Arrau and Oks (1992), Bovemberg and Evans (1988) and the discussion in chapter 2 of McKinnon (1991) for the empirical relevance of this issue.
As shown by Obstfeld and Stockman (1985), this assumption removes all intrinsic dynamics from the model.
It is assumed that there is no inflation in the rest of the world, and the world price level is normalized at 1.
The term ‘seigniorage’ refers to the total amount of resources collected by the government through money creation: σ=πm+ṁ. The term ‘inflation tax’ refers only to the erosion of money balances by inflation: ṁ=0. In steady state m=0 and thus, seigniorage is identical to the inflation tax. Notice also that because of the absence of banks and financial assets denominated in domestic currency, only the money base is subject to the inflation tax in this model.
Notice that the overestimation of saving is identical to the overestimation of disposable income, because when determining consumption the individual uses full knowledge of seigniorage, as implied by equation (4).
This is true for a permanent and unanticipated change in tax bases.
Notice, however, that in this case it would be impossible to understand why c went down without looking at the evolution of seigniorage.
It is assumed here that T is determined exogenously by the government. It would be more appropriate to treat T as endogenously determined by the rate of inflation and the amount of assets that the government intends to buy. This issue, however, is of no particular relevance in the analysis of the present section.
The inflation tax was calculated using the following formula:
INFTAX = π M0/Y
where M0 represents the beginning-of-the-year money base, π is the percentage increase in the CPI during the year, and Y is nominal GDP. No correction for interest payments on bank reserves was necessary because during the period 1978-1990 bank deposits in the central bank did not earned interest in either country.