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In the paper we show that common currency areas tend to amplify the inefficiencies associated with lack of credibility of monetary policy. Lack of commitment in redistribution of seigniorage leads to excessive inflation and suboptimal taxation in the Monetary Union. Lack of commitment to inflation creates multiple inefficient equilibria that do not exist in a regime of national monetary independence. [ABSTRACT FROM AUTHOR]

Empirical investigation of the average level of seigniorage in a cross-section of (up to) ninety countries for the period 1971-1990 suggests that optimum tax theory explains up to 40 percent of the cross-country variation in seigniorage, since seigniorage is higher where its deadweight tosses are probably lower and where deadweight losses from conventional taxation are probably higher, but that average government spending is nota determinant of seigniorage. Practical concerns about financing transitory government spending explain some of the remaining variation in seigniorage, and central bank independence and political instability are useful as well. In contrast, 90 percent of the cross-country variation in conventional taxation appears to be determined by the level of government spending and deadweight losses, and additional variables do not add to the results. [ABSTRACT FROM AUTHOR]

We examined a setting where decision making about financing a given amount of government spending is decentralized. Seigniorage is the residual tax that passively adjusts to meet the budget constraint. We place this budget-making process in a repealed game setting and characterize the cooperative tax-seigniorage function. Three main results are found: (i) Seigniorage and transitory changes in output are positively correlated. This result holds alter controlling for changes in government spending, (ii) A positive (negative) covariation between current-period government spending and transitory output strengthens (weakens) the positive relationship between seigniorage and transitory output, (iii) Seigniorage is negatively correlated with trend output growth. Time series empirical tests using annual data for twenty OECD countries support the first two results. A test using cross-section data on seventy-live countries confirms the third hypothesis. [ABSTRACT FROM AUTHOR]

The article presents an analysis of the multiple reserve requirement scheme of central banking and national fiscal and monetary policy. The traditional monetary concerns of small open economies are described, focusing on managing inflation while still financing the public deficit, usually through required bank reserve levels. The alternative method of multiple reserve requirements for differing currencies, cash and government securities, is formally outlined. Impacts of this scheme on inflation, seigniorage, and welfare are explored.

The article presents an analysis of the economic conditions of Argentina between the 1970s and 1990s in order to explore the connections between seigniorage and inflation effects. Econometric models providing a Laffer curve between the two elements are described. Three separate theories explaining the high inflation in relation to this curve are given and analyzed through the case of Argentina, questioning whether the inflation rate was above the revenue-maximizing rate. Additional elements explored include monetary/exchange rate paradigms and money demand.

The article analyzes the impact of money demand and seigniorage on high inflation phenomena. A model incorporating the three macroeconomic elements is developed through an optimizing consumer-investor-portfolio allocator with cash-in-advance constraints. It also presents both individual-country and combined cross-country time-series evidence that supports the notion that the semi-elasticity of money demand with respect to inflation varies with inflation itself. Empirical evidence from high-inflation countries during the 1960-1990 is also used to provide estimates of the seigniorage-maximizing inflation rate.

The article reports on inflation tax in an economy where there is no centralized decision maker, on competitive externalities, and on optimal seigniorage. Yugoslavia is given as an example of a monetary union that generated inflationary bias because it did not address competitive externalities. The inflation tax was determined by a group of decision makers who competed for tax revenues and printed paper money via the central bank, which functioned only as a printing agency. The central bank's failure to impose fiscal discipline and the ethnic and political frictions among provinces are assumed to be responsible for inflation. Budget constraints, time-consistent equilibrium, and the elimination of inflationary bias by a central government's control over monetary policy are mentioned.

The article comments on "Seigniorage As a Tax: A Quantitative Evaluation," by Ayse Imrohoroglu and Edward C. Prescott, which reported on simulation experiments concerning financial intermediation and interest-bearing and noninterest-bearing assets. The issue is the validity of their model for determining the costs of inflation. "Indexation and Discretionary Monetary Policy," a paper written by this article's author and Larry Ball, is discussed, as well as a staggered contract model for estimating wage and price variability during inflationary periods. The use of cash to smooth consumption and the inflation tax relative to the U.S. gross national product are mentioned.

The article evaluates seigniorage as a tax via a general equilibrium model, the efficacy of seigniorage relative to an income tax, and tax-monetary arrangements in the United States. Three sets of experiments are discussed which relate to interest payments on deposit accounts. The consumption smoothing role of liquid assets, inflation rate volatility, uncertainty in monetary policy, and the welfare cost of inflation are examined in mathematical models to determine after-tax real returns on assets. Data is given for economies with intermediation and inflation rates at three percent and six percent and for average real returns on Treasury Bills and savings accounts before and after taxation.

The article addresses the question of whether the U.S. Congress should allow banks to issue their own private currency. In this discussion, the article describes the role of the central bank in operating or regulating a payments system, the technological advances in currency, the effect of the National Currency Act, the loss of seigniorage, the effectiveness of monetary policy, the stability of monetary system, the history of uniform currency, and the need to develop models that explain the use and form of money.

The article refers to essays in "Handbook of Monetary Economics," comments on research methods used in "Seigniorage As a Tax: A Quantitative Evaluation," by Ayse Imrohoroglu and Edward C. Prescott, and focuses on the author's own views concerning inflation. Prescott and Imrohoroglu examined the welfare effect of inflation taxes with an experiment based on fixed nominal interest rates. The author states that transitory and persistent inflation result from negative aggregate supply shocks and from increases in the inflation tax without reductions in other taxes. He also states that consumers understand that higher price levels are associated with negative aspects of real disposable incomes.

The article focuses on the relationship between inflation rate and tax rate in the U.S. The article cites the work of economists James M. Poterba and Julio J. Rotemberg, who considered a framework in which government concerns with minimizing the deadweight loss of tax collection yields a suggested positive relationship between the inflation rate and the tax rate. In other words, as government spending rises, optimal financing would require raising both tax rates and seignorage so as to equalize the deadweight loss of the marginal dollar earned across the two alterative revenue-generating sources.