TY  - JOUR
AU  - Bruno,Michael
AU  - Fischer,Stanley
TI  - Seigniorage, Operating Rules and the High Inflation Trap
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2413
PY  - 1991
Y2  - February 1991
UR  - http://www.nber.org/papers/w2413
L1  - http://www.nber.org/papers/w2413.pdf
N1  - Author contact info:
Michael Bruno

Stanley Fischer
Governor
Bank of Israel
One Kaplan Street
Jerusalem 91007
ISRAEL
Tel: 9722-655-2701
Fax: 9722-652-8419
E-Mail: sfischer@bankisrael.gov.il
AB  - A given amount of seigniorage revenue can be collected at either a high or a low rate of inflation. Thus there ray be two equilibria when a government finances its deficit by printing money--implying that an economy may be stuck in a high inflation equilibrium when, with the same fiscal policy, it could be at a lower inflation rate. We show that under rational expectations the high inflation equilibrium is stable and the low inflation equilibrium unstable; under adaptive expectations or lagged adjustment of money balances with rational expectations, it may be the low inflation equilibrium that is stable. Extending the model to allow for bond as well as money financing of deficits, we show that one of the equilibria disappears if the government sets a nominal anchor for the economy, for instance by fixing the growth rate of money.  The dual equilibria and their stability.
ER  -