Seigniorage, Inflation, and Reputation

Herschel I. Grossman


John B. Van Huyck

Texas A&M University - Department of Economics; National Bureau of Economic Research (NBER)

November 1984

NBER Working Paper No. w1505

This paper derives a reputational equilibrum for inflation in a model in which the government obtains valuable seigniorage by issuing fiat money in echange for real resources. One insightful result is that , with contemporaneous perceptionof actual government behavior and immediate adjustment of real cash balences to new information , the Friedman elasticity solution for maximal seigniorage is the reputatoinal equilibrium. More generally , the analysis shows that the objective of maximal seigniorage produces an equilibrium inflation rate equal either to a generalization of the Friedman elasticity solution or to the rate at which the government discounts future seigniorage adjusted for the growth rate, whichever is larger. Thus, the model formalizes the conjecture that epizodes of inflation rates in excess of the Friedman solution are attributable to high discounts rates for future seigniorage. Adding aversion to high expected inflation to the model, this analysis also rationalizes the observation that inflation rates are usually less than Friedman's elasticity solution.

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Date posted: June 29, 2004  

Suggested Citation

Grossman, Herschel I. and Van Huyck, John B., Seigniorage, Inflation, and Reputation (November 1984). NBER Working Paper No. w1505. Available at SSRN: https://ssrn.com/abstract=227457

Contact Information

Herschel I. Grossman (deceased) (Contact Author)
John B. Van Huyck
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Texas A&M University - Department of Economics ( email )
5201 University Blvd.
College Station, TX 77843-4228
United States
979-845-7340 (Phone)
979-847-8757 (Fax)
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