Inflationary Finance under Discrepion and Rules

Robert J. Barro

NBER Working Paper No. 889 (Also Reprint No. r0450)
Issued in May 1982
NBER Program(s):   EFG

Inflationary finance involves first, the tax on cash balances from expected inflation, and second, a capital levy from unexpected inflation. From the standpoint of minimizing distortions, these capital levies are attractive, ex post, to the policymaker. In a full equilibrium two conditions hold: 1) the monetary authority optimizes subject to people's expectations mechanisms, and 2) people form expectations rationally, given their knowledge of the policymaker's objectives. The outcomes under discretionary policy are contrasted with those generated under rules. In a purely discretionary regime the monetary authority can make no meaningful commitments about the future behavior of money and prices. Under an enforced rule, it becomes possible to make some guarantees. Hence, the links between monetary actions and inflationary expectations can be internalized. There is a distinction between fully-contingent rules and rules of simple form. A simple rule allows the internalization of some connections between policy act ion and inflationary expectations, but discretion permits some desirable flexibility of monetary growth.

download in pdf format
   (340 K)

download in djvu format
   (228 K)

email paper

This paper is available as PDF (340 K) or DjVu (228 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0889

Published: Barro, Robert J. "Inflationary Finance under Discretion and Rules." Canadian Journal of Economics, Vol. 16, No. 1, (February 1983), pp. 1-16. citation courtesy of

Users who downloaded this paper also downloaded these:
Barro and Gordon w1079 Rules, Discretion and Reputation in a Model of Monetary Policy
Barro and Gordon w0807 A Positive Theory of Monetary Policy in a Natural-Rate Model
Fair w3102 Inflationary Expectations and Price Setting Behavior
Sargent The Ends of Four Big Inflations
Alesina and Tabellini w2308 A Positive Theory of Fiscal Deficits and Government Debt in a Democracy
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us