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Making a Dishonest Government Credible: The Inflation Tax
Credit and Capital Markets – Kredit und Kapital, Vol. 26 (1993), Iss. 2 : pp. 239–245
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Frank G. Steindl, Stillwater, Oklahoma
References
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Auernheimer, Leonardo: “The Honest Government’s Guide to the Revenue from the Creation of Money,” Journal of Political Economy, May/June 1974, 82: 598 - 606.
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Johnson, Harry G.: “A Note on the Dishonest Government and the Inflation Tax,” Journal of Monetary Economics, July 1977, 3: 375 - 78.
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Kyadland, Finn E. and Prescott, Edward D.: “Rules Rather than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy, June 1977, 85: 473 - 91.
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Abstract
Making a Dishonest Government Credible: The Inflation Tax
In a stationary economy a government maximizes revenue from the tax on real balances where the demand is unit elastic. In this paper, two propositions are established. First, it is shown that there is an incentive for government to gain additional revenue through surprise inflation by varying the rate around the traditional unit elastic revenue maximizing point. Second, it is demonstrated that this incentive is muted and, in some cases, entirely negated by the public’s actions based on its expectations of such revenue enhancing activity