Competitive Externalities and the Optimal Seigniorage.

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.