Seigniorage und Inflationsdynamik

Abstract

Seigniorage and the Dynamism of Inflation. Certain Basic Interrelationships

The starting point of this analysis in the conclusion known from the theory of inflation financing that an incentive invariably exists to seigniorage-based financing of public expenditures in those countries where the government has the note-issuing monopoly. This incentive is all the stronger the greater the difficulty of realizing alternative financing options and the stronger the political pressure for public expenditure increases. These conditions causing such incentive to be strong exist in most developing countries, especially where the distribution climate is characterized by conflict as is largely the case in Latin America. On the other hand, seigniorage-based financing of public expenditures is all the easier the stronger the note-issuing bank’s dependence on the country’s government. Seigniorage-based financing of public expenditures may now be assumed to be the cause of the dynamism of inflation and even hyperinflation under certain condition studied in this paper in some detail. Even though seigniorage-based financing of public expenditures is not necessarily any indispensable condition for the dynamism of inflation (cf. section III.1 for details), it poses an incessant danger of rising inflation in an economy. Hyperinflation may be unleashed by seigniorage-based financing of public expenditures even where the steady-state seigniorage shows a Laffer-curve characteristic and where transactors have rational expectations. This supposition may well be justified as microeconomically founded rational political behaviour, as indicated in section III.3. One would simply have to assume that the political authority has an information lead as regards its own inflationary intentions, that the learning process of private transactors is slow insofar as changes in inflationary intentions over time are concerned and that the time preference rate of the political authority is high. The same section also shows that there may be multiple inflation equilibria and that an economy, even if it is spared the fate of hyperinflation, may nonetheless end up with a higher rate of inflation than absolutely necessary. This is the case especially where economic policy does not provide any adequate nominal anchor (as a protective device so to speak). The dynamic system (in)stability and the kind of expectations formed are major distinctive criteria in the theoretical model analysis figuring in section III. With reference to those two distinctive criteria, section IV discusses the basis of the necessary and adeqguate economic policy precautions against such seigniorage-based financing of the dynamism of inflation. It is especially emphasized in this context that in certain situations a socalled “orthodox” stabilization strategy may be sufficient, whilst in other situations – such as system instability and/or the formation of rational expectations – a socalled “heterodox” strategy would rather be preferable or necessary, respectively