Money Demand and Seignorage-Maximizing Inflation

38 Pages Posted: 5 Oct 2017

See all articles by William Easterly

William Easterly

New York University - Department of Economics

Paolo Mauro

International Monetary Fund (IMF)

Klaus Schmidt-Hebbel

Pontifical Catholic University of Chile

Date Written: May 1, 1995

Abstract

Conventional estimates of the seigniorage-maximizing inflation rate often make use of the Cagan form, which implies a constant semielasticity of money demand with respect to inflation. This paper shows that the elasticity of substitution in transactions between money and bonds determines how the inflation semielasticity of money demand changes as inflation rises. Allowing for a variable semielasticity, estimates of seigniorage-maximizing inflation for a panel of eleven high-inflation countries are lower than those obtained by using the Cagan form. Estimates based on the correct measure of the opportunity cost of money also differ sharply from those obtained when using conventional inflation measures.

Suggested Citation

Easterly, William and Mauro, Paolo and Schmidt-Hebbel, Klaus, Money Demand and Seignorage-Maximizing Inflation (May 1, 1995). Journal of Money, Credit, and Banking, Vol. 27, No. 2, 1995. Available at SSRN: https://ssrn.com/abstract=3041995

William Easterly

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Paolo Mauro

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Klaus Schmidt-Hebbel (Contact Author)

Pontifical Catholic University of Chile ( email )

Av. Vicuna Mackenna 4860
Santiago
Chile

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