Seigniorage-Maximizing Inflation under Sticky Prices

Tatiana Damjanovic, Charles Nolan

    Research output: Contribution to journalArticlepeer-review

    Abstract

    What is the seigniorage-maximizing level of inflation? Three models' formulae for the seigniorage-maximizing inflation rate (SMIR) are compared. A sticky-price model prescribes a somewhat lower SMIR to Cagan's formula and a variant of a flex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labor market: The sticky-price (Calvo) model implies that inflation and output are negatively related and that output is falling in price stickiness. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the United States and the United Kingdom may be quite close to the SMIR.

    Original languageEnglish
    Pages (from-to)503-519
    Number of pages17
    JournalJournal of Money, Credit and Banking
    Volume42
    Issue number2-3
    Publication statusPublished - 2010

    Keywords

    • E4
    • E52
    • E61
    • E63
    • price stickiness
    • revenue-maximizing inflation
    • inflation tax
    • seigniorage
    • price dispersion

    Fingerprint

    Dive into the research topics of 'Seigniorage-Maximizing Inflation under Sticky Prices'. Together they form a unique fingerprint.

    Cite this