Seigniorage-Maximizing Inflation under Sticky Prices


  • We thank participants at the 2007 conference Growth and Business Cycles in Theory and Practice at the University of Manchester and the 2008 Royal Economic Society Conference for helpful comments. We are especially indebted to Stephen Millard for pointing out an error in a previous version of this paper. We also thank the editor and two referees of this journal for helpful comments. The usual disclaimer applies.


What is the seigniorage-maximizing level of inflation? Three models' formulae for the seigniorage-maximizing inflation rate (SMIR) are compared. A sticky-price model prescribes a somewhat lower SMIR to Cagan's formula and a variant of a flex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labor market: The sticky-price (Calvo) model implies that inflation and output are negatively related and that output is falling in price stickiness. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the United States and the United Kingdom may be quite close to the SMIR.