optimal inflation tax under precommitment theory and evidence the authors develop and test the orthogonality conditions implied by a dynamic model of the inflation tax a distinguishing feature of the analysis is that the welfare loss from inflation the money demand function and the time path of inflation are jointly derived from first principles of government and private sector intertemporal optimization quarterly data for argentina brazil and israel are used in implementing the model although the overidentifying restrictions of the model are not rejected in most cases there are several data points characterized by higher rates of inflation than the optimal rates under precommitment copyright 1992 by american economic association

money demand and seigniorage maximizing inflation conventional estimates of the seigniorage maximizing inflation rate often make use of the cagan form which implies a constant semielasticity of money demand with respect to inflation this paper shows that the elasticity of substitution in transactions between money and bonds determines how the inflation semielasticity of money demand changes as inflation rises allowing for a variable semielasticity estimates of seigniorage maximizing inflation for a panel of eleven high inflation countries are lower than those obtained by using the cagan form estimates based on the correct measure of the opportunity cost of money also differ sharply from those obtained when using conventional inflation measures copyright 1995 by ohio state university press

budget deficits stability and the monetary dynamics of hyperinflation hyperinflationary processes usually occur in countries with extremely large budget deficits in models of inflationary finance with rational expectations e g buiter 1987 large budget deficits cannot lead to hyperinflation the purpose of this paper is to reconcile the standard theoretical model with the stylized facts it shows that by introducing a lag in the adjustment of the money market into the standard inflationary finance model large budget deficits are indeed the main reason for hyperinflation the paper also provides an explanation for the ineffectiveness of moderate reductions in the deficit in reducing inflation and argues that fiscal lags can be destabilizing copyright 1989 by ohio state university press

distinguished lecture on economics in government the economist vs madmen in authority this lecture given to the society of government economists in january 1995 examines the influence of research on policy and vice versa using three widely believed propositions the first is that government spending is wasteful or ineffective and can readily be cut back in order to reduce the deficit the second is that welfare should be time limited and made conditional on people s behavior the third is that education and training are more than ever the ticket to individual and national prosperity the paper explores the interplay of facts of economic analysis with political and institutional constraints and public values

the demand for money in developing countries assessing the role of financial innovation traditional specifications of money demand have commonly been plagued by persistent overprediction implausible parameter estimates and highly autocorrelated errors the authors argue that some of these problems stem from the failure to account for the impact of financial innovation they estimate money demand for ten developing countries using various proxies for financial innovations they also assess the relative importance of this variable finding financial innovation can be better modeled as a stochastic random walk trend rather than a deterministic time trend financial innovation plays an important role in determining fluctuations of the demand for money the importance of this role increases with the rate of inflation

interest rates and the exchange rate a non monotonic tale abstract for over 30 years the empirical international finance literature has been unable to detect a clear systematic relationship between interest rates and the nominal exchange rate we take a fresh look at the data and uncover a new stylized fact for a cross section of countries the relationship between the exchange rate and short term interest rates is non monotonic small increases in the nominal interest rate appreciate the currency whereas larger increases depreciate the currency we develop a model that explains this stylized fact based on the interaction of three effects higher interest rates increase money demand and hence appreciate the currency but also raise the fiscal deficit and depress output both of which tend to depreciate the currency we provide cross country evidence for the presence of these effects in the data

seigniorage operating rules and the high inflation trap there may be both a high and a low inflation equilibrium when the government finances the deficit through seigniorage 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 the low inflation equilibrium may be stable adding bond financing dual equilibria remain if the government fixes the real interest rate but a unique equilibrium is attained when the government sets a nominal anchor for the economy the existence of dual equilibria is thus a result of the government s operating rules

empirical estimates of inflation tax laffer surfaces a 30 country study abstract long run or steady state inflation tax laffer surfaces are estimated with annual data over the 1960s through early 1990s for a varied group of 30 countries using the cagan semi elastic demand for currency and for deposits the model includes an explicit role for the reserve ratio variations in which are shown to be important in explaining inflation tax revenue statistically countries inflation and reserve ratio management are examined in terms of where they operated with respect to steady state laffer boundaries defined as the locus of instruments inflation and reserve ratio that maximize the inflation tax analysis is performed both in terms of sample means of the instruments and their annual values each approach requiring a different conceptual framework few countries operated frequently on the wrong side of the laffer surface

time consistent collection of optimal seigniorage a unifying framework this paper reviews the existing literature on the time consistency problem of seigniorage collection when monetary policy is determined by optimal taxation considerations it develops a unifying accounting framework and suggests a general measure for seigniorage which encompasses the standard measures employed in the literature in addition the ex ante optimal solution to the optimal taxation problem is derived and interpreted in relation to the ramsey principle we show that the different recommendations of the public finance literature i e the friedman rule of optimal deflation moderately positive inflation and seigniorage maximizing inflation are specific solutions to the optimal taxation problem the paper continues with a formal illustration of the time consistency problem of the ex ante optimal policy and the characterization of the time consistent solution under discretion as possible solutions to the time consistency problem we consider reputational forces institutional reforms that establish central bank independence and specific ways of asset and debt management in particular it is formally shown that a modified version of the asset and debt management scheme suggested by persson persson and svensson is not only necessary but also sufficient for optimality although this did not hold in their model

seigniorage revenue deficits and self fulfilling currency crises abstract this paper examines potential resolutions to the conflict between a fixed exchange rate and seigniorage revenue requirement of a stylized developing economy that gives rise to a currency crisis the government has an informational advantage and can decide when it is optimal to invoke an escape clause i e to drop the peg and float speculators must guess when the crisis will happen based on their assessment of the probability of collapse and this makes pegged exchange rate equilibria unstable

money demand and exchange rate determination under hyperinflation conceptual issues and evidence from yugoslavia a modified monetary model of exchange rate determination is advanced and tested for the yugoslav hyperinflation of 1992 94 stating that the exchange rate is determined directly in the money market thus implying that private agents due to dollarization denominate their real money holdings in foreign currency empirical evidence supports the advanced model apart from the last seven months of the yugoslav hyperinflation the exact re present value model of the exchange rate is accepted while that of the price level is rejected for the whole period of hyperinflation the modified money demand schedule with money holdings denominated in foreign currency is nonlinear with decreasing semielasticity of money demand

cagan s paradox and money demand in hyperinflation revisited at daily frequency using daily data the cagan money demand is estimated and accepted for the most severe portion of serbia s 1992 1993 hyperinflation i e its last 6 months an implication is that the public adjusted daily throughout this extreme period moreover the obtained semi elasticity estimates are by far lower than those previously found using monthly data sets consequently the daily estimates reject the longstanding cagan s paradox based on monthly studies by showing that the economy has been on the correct increasing side of the laffer curve almost through the end of hyperinflation this strongly supports the view that hyperinflation is triggered and driven all way through its end by the government s hunt for non decreasing seigniorage daily adjustments of public in hyperinflation can account for the difference between the results obtained at daily and monthly frequencies calling into question the latter some evidence is offered that the findings of this paper may hold for other hyperinflations

when politics and models collide estimating models of multiparty elections theory the spatial model of elections can better be represented by using conditional logit models which consider the position of the parties in issue spaces than by multinomial logit models which only consider the position of voters in the issue space the spatial model and random utility models in general suffer from a failure to adequately consider the substitutability of parties sharing similar or identical issue positions hypotheses multinomial logit is not necessarily better than successive applications of binomial logit conditional logit allows for considering more interesting political questions than does multinomial logit the spatial model may not correspond to voter decision making in multiple party settings multinomial probit allows for a relaxation of the iia condition and this should improve estimates of the effect of adding or removing parties methods comparisons of binomial logit multinomial logit conditional logit and multinomial probit on simulated data and survey data from multiparty elections results multinomial logit offers almost no benefits over binomial logit conditional logit is capable of examining movements by parties whereas multinomial logit is not multinomial probit performs better than conditional logit when considering the effects of altering the set of choices available to voters estimation of multinomial probit with more than three choices is feasible

inflation shoe leather costs and average inflation rates across countries abstract cross country differences in average inflation rates among 30 countries are well explained by differences in estimated shoe leather cost functions relating these costs to the inflation tax the shoe leather costs are estimated by means of the standard cagan semi log demand for real balances modified to take account of variations in reserve ratios and the effects of these variations on the demand for the monetary base the results are consistent with optimization on the part of an efficient government theory but are not adequate to discriminate between efficient government models and many others for which shoe leather costs play at least a substantial role in policy makers decisions the imposition of the semi log form does not seem critical in arriving at these conclusions although this form tends to produce more reasonable looking laffer surfaces than more flexible forms

modeling choice of fuelwood source among rural households in malawi a multinomial probit analysis abstract this paper addresses two questions what determines household s choice of fuelwood source and what are the environmental consequences of fuelwood collection choices we address these questions by estimating the multinomial probit model using survey data for households surrounding chimaliro and liwonde forest reserves in malawi after controlling for heterogeneity among households we find strong substitution opportunities across fuelwood collection sources attributes of the fuelwood sources size and species composition and distance to the sources are the most important determinants of fuelwood choice further results show that customary managed forests generate environmental benefits by reducing pressure on both plantation forests and forest reserves these findings support the need to strengthen community based institutions to manage local forest resources

is financial repression a solution to reduce fiscal vulnerability the example of france since the end of world war ii this article contributes to the recent empirical literature on financial repression and focuses on the french case since the end of world war ii we find that the fiscal adjustment needed to lower the debt ratio has been smaller during the years of financial repression in comparison with those of liberalized financial markets this was possible because the real interest rates were low we conduct a counterfactual analysis to see whether the vulnerability of public finances would have been different if since the late 1980s the governments had continued carrying out the same financial repression policies we answer affirmatively showing that the cost of debt service would have been reduced

external debt inflation and the public sector toward fiscal policy for sustainable growth which tradeoffs are involved in formulating an external debt strategy should expenditure be cut to improve the current account or will this reduce future output growth thus undermining the benefits of any debt reduction are there alternatives that allow satisfactory output growth without jeopardizing creditworthiness how can the necessary surplus of savings over investment be brought about at levels of investment high enough to sustain output growth should the government contribute to the internal adjustment by reducing its deficit macroeconomic targets for inflation and growth and creditworthiness constraints on debt issue impose restrictions on the extent to which deficits can be financed can the government cover the deficit within these targets and constraints the absence of such consistency forebodes future policy change and so undermines the credibility of the adjustment program the author uses empirical work on turkey to illustrate the interactions between fiscal deficits and the macroeconomic variables upon which fiscal consistency hinges

property rights and deforestation the choice of fuelwood source in rural viet nam this paper analyses the choice of fuelwood supply sources in rural viet nam of which one the open access area is subjected to deforestation a random parameter logit estimation allows us to calculate cross elasticities between the various sources using derived shadow prices for fuelwood from each source we find a relatively stronger substitution effect emerging between user right plantation and open access areas this implies that a policy intervention of fuel from plantations might be an efficient option to halt deforestation analysis of producer surplus measures explains the reluctance by households to accept managerial responsibilities of open access areas

the forbidden fuel charcoal urban woodfuel demand and supply dynamics community forest management and woodfuel policy in malawi abstract this article examines woodfuel policy challenges and opportunities in malawi two decades after woodfuel crisis narratives and counter narratives a nuanced examination of woodfuel supply demand use and markets illuminated options to turn stagnant policies based on charcoal bans and fuel substitution into proactive realistic ones acknowledging woodfuel dominance and its socio economic importance findings revealed growing spatially differentiated woodfuel deficits in southern and central malawi and around blantyre zomba and lilongwe cities poverty limited electricity access reliability and generation exacerbated by tariff subsidies and complex fuel allocation decisions restricted energy ladder transitions from woodfuels to electricity producing an enduring urban energy mix dominated by charcoal thereby increasing wood consumption diverse socio political interests prevented lifting of the charcoal ban despite progressive forest laws despite implementation challenges lessons already learnt efficiency and poverty reduction arguments limited government capacity growing illegal production of charcoal in forest reserves and its staying power make targeted community based forest management cbfm approaches more practical for regulated commercial production of woodfuels than the status quo new differentiated policies should include commercial woodfuel production and licensing for revenue and ecological sustainability under cbfm or concessions within and outside selected reserves an enterprise based approaches for poverty reduction smallholder private tree growing woodfuel energy conserving technologies improved electricity supply and agricultural productivity

serial correlation and the fixed effects model this paper generalizes the durbin watson type statistics to test the ols residuals from the fixed effects model for serial independence also generalized are the tests proposed by sargan and bhargava for the hypothesis that the residuals form a random walk a method for efficient estimation of the parameters is also developed finally an earnings function is estimated using the michigan survey of income dynamics in order to illustrate the uses of the tests and the estimation procedures developed in this paper

currency crises and contingent liabilities a contingent liability is a future spending commitment that is realized with some probability international organizations emphasize the dangers of contingent liabilities when providing advice why one answer is obvious if significant contingent liabilities are realized they commit governments to substantial fiscal costs there is a further reason by taking on a contingent liability the government can increase the probability of the underlying shock taking place this paper describes how the issuance of government guarantees and the methods by which they are financed affect the probability of crises taking place it also discusses the determinants of post crisis inflation and depreciation

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

output costs currency crises and interest rate defence of a peg central banks typically raise short term interest rates to defend currency pegs higher interest rates however often lead to a credit crunch and an output contraction we model this trade off in an optimising first generation model in which the crisis may be delayed but is ultimately inevitable we show that higher interest rates may delay the crisis but raising interest rates beyond a certain point may actually bring forward the crisis due to the large negative output effect the optimal interest rate defence involves setting high interest rates relative to the no defence case both before and at the moment of the crisis

an empirical analysis of household energy choice in ghana abstract using data from two recently available living standards surveys we trace the dynamics in cooking fuel choice among ghanaian households over the period 2005 6 and 2012 13 and further investigate the main forces driving households choice of a cooking fuel evidence from this paper reveals a significant transition from fuelwood use towards lpg over the period results further reveal factors such as price reliability in supply of lpg income and other household attributes as significant factors influencing households choice of a given energy type for cooking relevant policy prescriptions are offered to engender sustainable energy use and reduce over reliance on the already depleted forest resources for biomass energy

forest dependence and participation in cpr management empirical evidence from forest co management in malawi abstract we develop an endogenous sample selection model to investigate how forest dependence influences a household s decision to participate in forest co management program using data from chimaliro and liwonde forest reserves in malawi we find that where forests primarily have a gap filling or safety net role in chimaliro high forest dependency induces higher rates of participation however with more commercial forest uses and a more heterogeneous social context as in liwonde high forest dependency reduces the incentives for participation the findings point to the need to design parallel interventions alongside the forest co management program in order to provide supplementary income sources to participants and increase the incentives for participation

woodfuels livelihoods and policy interventions changing perspectives in the 1970s it appeared that fuelwood use was growing rapidly and this could have major adverse impacts on the resource and poor users by the mid 1980s revised assessments indicated that there was less of a problem than had been foreseen and much less of a need for forestry interventions to maintain supplies as a result many of the latter were sharply scaled back additional information and analysis that has become available since the 1980s support the view that there is no need for large scale interventions devoted just to provision of fuelwood however declining access to supplies or markets can raise significant problems in some areas and for particular categories of user growing urban demand for charcoal can also cause local problems in particular in africa the potentials for appropriate forms of intervention are discussed

seigniorage maximizing inflation under sticky prices what is the seigniorage maximizing level of inflation three models formulae for the seigniorage maximizing inflation rate smir are compared a sticky price model prescribes a somewhat lower smir to cagan s formula and a variant of a flex price model due to kimbrough 2006 the models differ markedly in how inflation distorts the labor market the sticky price calvo model implies that inflation and output are negatively related and that output is falling in price stickiness interestingly if our version of the calvo model is to be believed the level of inflation experienced recently in advanced economies such as the united states and the united kingdom may be quite close to the smir

recreation demand models with taste differences over people we estimate random parameter logit models of anglers choice of fishing site the models generalize logit by allowing coefficients to vary randomly over anglers rather than being fixed the models do not exhibit the restrictive independence from irrelevant alternatives property of logit and can represent any substitution pattern estimation explicitly accounts for the fact that the variation in coefficients over anglers induces correlation in unobserved utility over trips by the same angler willingness to pay for improved fish stock and the value to anglers of specific sites are calculated from the models and compared with the estimates obtained from a standard logit model

sterilization of short term capital inflows through lower interest rates reductions in international interest rates are a major cause of capital flows to emerging economies increases in domestic interest rates are a frequent policy response to the resulting price increases this is often unsuccessful the paper suggests a theoretical explanation based on distinctive features of emerging financial markets including imperfect asset substitutability and imperfect capital mobility for some sectors of the economy it concludes that the appropriate policy response to capital inflows may be lower interest rates

public sector price increases credibility and welfare abstract this paper examines the dynamics of inflation and unemployment when the government increases public sector prices and wage indexation prevents the labor market from clearing in the short run credible reforms are virtually certain to be immediately deflationary and welfare improving even when the labor market clears very slowly temporary price increases however usually produce higher inflation after a short period of time and often reduce welfare when higher inflation provokes the government to reverse the reform there exist multiple self fulfilling equilibria

functional form of the demand for real balances in cagan s hyperinflation model this paper uses recent advances in the development of testable implications of the cagan model of hyperinflation it extends the range of candidate functional forms of the demand for real balances in hyperinflations to include nonstandard versions in which the absolute inflation elasticity is a decreasing function of inflation these nonstandard functional forms are of interest because they are known to have desirable theoretical properties this paper finds empirical justification for a nonstandard form that performs at least as well as the traditional semilogarithmic functional form

is currency seigniorage exogenous for inflation tax in turkey this paper discusses the implications of the validity of the conditioning hypothesis for the maintained money demand equation for an inflation tax analysis we also test the validity of the quantity theoretical inflation tax model for the post 1980 quarterly turkish data by using johansen cointegration techniques the results suggest that the tax rate inflation is weakly exogenous for the parameters of the long run money demand tax base equation this result consistent with a keynesian endogenous seigniorage exogenous inflation tax rate theory prior does not support the hypothesis that the turkish inflation can be explained by the conventional inflation tax revenue maximizing motive alone