TY  - JOUR
AU  - Grossman,Herschel I.
AU  - Huyck,John B. Van
TI  - Seigniorage, Inflation, and Reputation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1505
PY  - 1987
Y2  - March 1987
UR  - http://www.nber.org/papers/w1505
L1  - http://www.nber.org/papers/w1505.pdf
N1  - Author contact info:
Herschel Grossman
Department of Economics
Box B
Brown University
Providence, RI  02912
Tel: 401/863-2606
Fax: 401/863-1970

John B.. Van Huyck
Department of Economics
Texas A&M University
College Station, TX  77843
E-Mail: john.vanhuyck@tamu.edu
AB  - This paper derives a reputational equilibrum for inflation in a model in which the government obtains valuable seigniorage by issuing fiat money in echange for real resources. One insightful result is that , with contemporaneous perceptionof actual government behavior and immediate adjustment of real cash balences to new information , the Friedman elasticity solution for maximal seigniorage is the reputatoinal equilibrium. More generally , the analysis shows that the objective of maximal seigniorage  produces an equilibrium inflation rate equal either to a generalization of the Friedman elasticity solution or to the rate at which the government discounts future seigniorage adjusted for the growth rate, whichever is larger. Thus, the model formalizes the conjecture that epizodes of inflation rates in excess of the Friedman solution are attributable to high discounts rates for future seigniorage. Adding aversion to high expected inflation to the model, this analysis also rationalizes the observation that inflation rates are usually less than Friedman's elasticity solution.
ER  -