DP519 Dynamic Seigniorage Theory: An Exploration

Author(s): Maurice Obstfeld
Publication Date: March 1991
Keyword(s): Dynamic Games, Markov Perfect Equilibrium, Seigniorage, Time Consistency
JEL(s): 134, 321
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=519

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.