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DYNAMIC SEIGNIORAGE THEORY

An Exploration

Published online by Cambridge University Press:  02 March 2005

MAURICE OBSTFELD
MAURICE OBSTFELD
Affiliation:
University of California, Berkeley National Bureau of Economic Research and Centre for Economic Policy Research
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Abstract

This paper develops a dynamic model of seigniorage in which economies' equilibrium paths reflect the ongoing strategic interaction between an optimizing government and a rational public. The model extends existing positive models of monetary policy and inflation by explicitly incorporating the intertemporal linkages among budget deficits, debt, and inflation. A central finding is that the public's rational responses to government policies may well create incentives for the government to reduce inflation and the public debt over time. A sufficiently myopic government may, however, provoke a rising equilibrium path of inflation and public debt.

Keywords

SeigniorageDynamic GamesTime ConsistencyMarkov Perfect Equilibrium
Type
Research Article
Information
Macroeconomic Dynamics , Volume 1 , Issue 3 , September 1997 , pp. 588 - 614
Copyright
© 1997 Cambridge University Press

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