Seigniorage Revenue and Inflation Tax in Turkish economy

The goal of this study is to test the implication of optimal seigniorage theory that in the long run higher tax rates are associated with higher inflation rates and higher nominal interest rates. For this purpose, we examine the long run relationship between nominal interest rates, inflation and tax revenue using time series dataset for Turkish Economy for the period 1980-2011. We estimate the Mankiw’s (1987) optimal seigniorage model for Turkish Economy with the cointegration and vector error correction methods (VECM). According to econometric result, in long run there is a causality relationship from inflation and tax revenue to nominal interest rates. However, in short run we could not find any evidence that support a causality from inflation and tax revenue to nominal interest rates.