Inflationary Finance in a Simple Voting Model

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Inflationary Finance in a Simple Voting Model

Please use this identifier to cite or link to this item: http://hdl.handle.net/10355/2742

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Title: Inflationary Finance in a Simple Voting Model
Author: Bhattacharya, Joydeep; Haslag, Joseph H.; Bunzel, Helle
Date: 2001-09
Publisher: Department of Economics
Citation: Department of Economics, 2001
Series/Report no.: Working papers (Department of Economics);WP 01-08
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

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