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    Inflationary Finance in a Simple Voting Model

    Bhattacharya, Joydeep
    Haslag, Joseph H.
    Bunzel, Helle
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    [PDF] InflationaryFinanceSimpleVotingModel.pdf (499.4Kb)
    Date
    2001
    Format
    Working Paper
    Metadata
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    Abstract
    This paper is an attempt at answering the somewhat counterfactual question: if monetary policy was to be decided in the arena of public voting (that is not by independent central banks), then what kind of monetary policies (specifically, inflation rates) would get elected? Alternatively, if central banks cannot turn off the "political pressure valve", what kind of monetary policies are they likely to implement? We employ a standard overlapping generations model with heterogenous young-age endowments, and a government that funds an exogenous spending via a combination of lump-sum income taxes and the inflation tax. In the baseline model with money as the sole asset, we find that elected reliance on seigniorage increases (at a decreasing rate) as the extent of income inequality increases. When the baseline model is augmented to allow for costly access to a fixed real return asset, we find that the relationship between elected reliance on the inflation tax and income inequality becomes non-monotonic; in particular, the reliance inseigniorage may actually decrease as income inequality rises. We find strong impirical backing for this hypothesis from a cross-section of countries. We also find that the likelihood of non-existence of majority voting equilibria is high in economies with a sufficiently high degree of income inequality. These economies would resumably benefit the most from a truly independent central bank.
    URI
    http://hdl.handle.net/10355/2742
    Part of
    Working papers (Department of Economics);WP 01-08
    Part of
    Economics publications
    Citation
    Department of Economics, 2001
    Rights
    OpenAccess.
    This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License.
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    • Economics publications (MU)

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