Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 237 Abstract:
A model is presented in which governments can select real expenditure levels which are feasible, hut are sufficiently high that a balanced budget is impossible. Thus governments with large expenditures are committed to inflationary finance schemes. This is the case even though the governments in question have access to lump-sum taxes. In addition, the model can explain why poorer countries tend to make heavier use of the inflation tax than do wealthier countries, and can account for the existence of country-specific fiat monies.
Keyword: Government expenditure, Inflationary finance, Real expenditures, Inflation tax, and Deficit Subject (JEL): H62 - National Deficit; Surplus, H50 - National Government Expenditures and Related Policies: General, and E31 - Price Level; Inflation; Deflation