Seigniorage-maximizing inflation under sticky prices
Journal of Money, Credit and Banking
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.
Pre-print version dated Jul 2008 issued as working paper by St Andrews University. Final version published by Wiley; available online at http://onlinelibrary.wiley.com/
Vol. 42, Issue 2-3, pp. 503 - 519