Dynamic Inconsistency and the Seignorage Paradox

Fernando Perera-Tallo

Universidad de La Laguna, S/C de Tenerife, Spain.

DOI: 10.4236/tel.[phone]                

Abstract

Why do governments that pursue seignorage set growth rates of money that exceeds the one that maximizes it? This paper presents a Keynesian model with a government that pursues seignorage but dislikes inflation. Dynamic inconsistency problems prevent the implementation of the optimal growth rate of money and even the existence of stationary equilibrium. When stationary equilibrium exists, it is multiple and the growth rate of money is larger than the one that maximizes seignorage in some or even all equilibria.

Keywords

Seignorage, Dynamic Inconsistency, Monetary Policy

Conflicts of Interest

The authors declare no conflicts of interest.

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