Inflation and seigniorage in Argentina

Argentina, where increases in inflation appear to be closely linked to government attempts to raise seigniorage, was chosen for this study because of its persistent high rates of inflation and its fiscal imbalance. Monetization of fiscal deficits becomes a major force for creating money and inflation in countries with limited access to domestic and foreign credit. The authors found that inflation in Argentina played an important role in generating public sector revenues. The authors found that at the revenue maximizing rate of inflation, the government can get seigniorage of about 7.5 % of GDP in steady state. Between June 1978 and April 1985, there was a clear, positive relation between inflation and the inflation tax for rates of inflation below 18 %. At the 20 % range, the inflation tax ranged from 7 to 10 % of GDP. Increases in inflation above 20 % do not give the government more inflation tax revenues. The direct implication of this situation is that any serious stabilization effort requires finding an alternative source of revenue to replace the inflation tax.