Maximizing Seigniorage and Inflation Tax: The Case of Belarus

Realizing the inflationary potential of money creation, by the mid-1990s, most Central European countries had switched to market instrument-based monetary policy. Belarus continued to use money emission, gaining seigniorage and inflation tax. The productivity of the inflation tax can be analyzed by comparing the revenue actually raised from inflation tax with the revenue that could be raised if the quantity of money had risen at a constant rate. The present paper, based on Cagan's (1956) seminal work, analyzes the effect of inflation on seigniorage revenue in Belarus, drawing conclusions about the effectiveness of monetary policy in 1995-2002, and about the consequences of inflationary financing.