Bresciani-Turroni, Constantino, 1937, “The Economics of Inflation,” translated by Millicent E. Sayers (London: Allen and Unwin).
Cagan, Phillip, 1956, “The Monetary Dynamics of Hyperinflation.” In Milton Friedman, editor, Studies in the Quantity Theory of Money (Chicago: The University of Chicago Press).
Fischer, Stanley, 1994, “Modern Central Banking.” In Forrest Capie, Charles Goodhart, Stanley Fischer, and Norbert Schnadt, editors, The Future of Central Banking: the Tercentenary Symposium of the Bank of England (New York, N.Y.: Cambridge University Press).
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)| false Fischer, Stanley, 1994, “ Modern Central Banking.” In Forrest Capie, Charles Goodhart, Stanley Fischer, and Norbert Schnadt, editors, The Future of Central Banking: the Tercentenary Symposium of the Bank of England( New York, N.Y.: Cambridge University Press).
Guardia, E.R., 1992, Orçamento Público e Política Fiscal: Aspectos Institucionais e a Experiência Recente. M.A. Dissertation, Universidade de Campinas, Sao Paulo.
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Patinkin, Don, 1993, “Israel’s Stabilization Program of 1985, Or Some Simple Truths of Monetary Theory.” Journal of Economic Perspectives 7(2), pp. 103-28.
Tanzi, Vito, 1978, “Inflation, Real Tax Revenue, and the Case for Inflationary Finance: Theory with an Application to Argentina.” IMF Staff Papers 25 (3), 417-51.
Thanks to Rudi Dornbusch, Stanley Fischer, Peter Isard, and Paul Masson for helpful comments.
The concept of the virtual deficit is mentioned by Fischer (1994) in a footnote. He claims that there is a case for calculating a “zero-inflation deficit” (different from the operational deficit) because of the Tanzi effect and because the real interest rate might change if inflation were stabilized.
Bacha (1994) also proposes a deficit finance model in which the budget deficit is represented by a linear inverse function of inflation.
If payment is postponed by 15 days, real outlays are reduced by 3 percent if inflation is 100 percent, by 7 percent if inflation is 500 percent, and by 10 percent if inflation is 1,000 percent.
To obtain equation 2, define the share in income of seigniorage collected by the central bank as s ≡ ΔH/Y. Given ΔH≡ zΔM, where z ≡ the inverse of the money multiplier (or the ratio of H to M), substitution yields s ≡ z ΔM/Y. Divide and multiply this expression by M, define ΔM/M (money growth) ≡ μ, and assume that the money supply is equal to the demand for money, M/Y= l/ν(π).
In the simulations the parameters of the Cagan function are consistent with those observed in Brazil, where between 1950 and 1995 the central bank’s seigniorage averaged about 2 percent of GDP, but never exceeded 4 percent of GDP, even at four-digit inflation rates. Appendix 2 contains the empirical evidence on velocity in Brazil between 1950 and 1995.
The literature on seigniorage defines optimal seigniorage as that obtained at the revenue maximizing rate of inflation.
Before calculating the tax on cash balances in Austria, Germany, Greece, Hungary, Poland, and Russia after World War I, Cagan (1956) observes that institutions other than the government typically receive some of the revenue from issuing money.
In the second half of 1994 the required reserves-to-loans ratio increased from 0 to 15 percent, the required reserves-to-savings deposits rose from 20 to 30 percent, and in May 1995 required reserves to time deposits also increased from 20 to 30 percent (source: Brazil′s central bank).
The share in GDP of deposit banks’ seigniorage is: (1- z)ΔM1/GDP = [(1-R/D)/(1+C/D)]ΔM1/GDP = (ΔM1-Δ H)/GDP, where R/D is the reserves to deposit ratio and C/D is the currency deposit ratio. This share was calculated using changes in the average money balances during the year.
Because a decline in total seigniorage collection was matched by a decline in seigniorage collection by the commercial banks, leaving seigniorage collected by the central bank unchanged, there was not a wealth effect from the decline in inflation, but only a transfer between the banking sector and the nonbanking sector. In 1996 though, the central bank′s seigniorage did decline to 1 percent of GDP.
A difficult issue, which the fiscal figures in Table 3 do not reflect, concerns the quasi- fiscal deficits in federal and state banks, which could be substantial. For instance, the federally owned Banco do Brasil has traditionally subsidized credit to agriculture, and the National Bank of Development (BNDES) subsidizes credit to exporters. In 1996 the Treasury recapitalized Banco do Brasil by 7.9 billion reals (more than one percent of GDP). This recapitalization has contributed to the increase of total net public deb, estimated to have risen from 30 percent of GDP in 1995 to 35 percent in 1996. The costs of restructuring the banking sector and the impact of these changes on the fiscal budget are not yet clear. And with the end of high inflation, bad loans from state banks to state governments have also emerged as a serious problem.
Data for taxes and government consumption expenditures are from Brazil’s national accounts for the years between 1965 and 1994, except where noted. Income taxes are collected by the central government. The sales taxes are value-added taxes collected by state governments (ICMS) and by the central government (IPI). Data for investment by public enterprises between 1980 and 1996 are from the Treasury Department of the Finance Ministry.