Seignorage and Welfare Cost of Inflation in Iran

Subject Areas : Applied Economics

علیرضا مرادی ¹ ( ندارد )

Received: 2011-09-04 Accepted : 2011-10-18 Published : 2011-06-22

Keywords: Monetary policy, Seignorage, Rational expectations, Generalized Method of Moments , Non-linear System of Simultane,

Abstract :

After the monetarists' views of the importance of the role of money in inflation formation, stylized facts have emphasized on the fact that inflation has highest correlation with money supply variations. This statement is emphasized by many schools of macroeconomics. Hence in adopting any monetary policies, reducing the welfare costs of inflation, should be targeted. But governments can make revenue from the monopolistic power of printing money, which is called Seignorage. In this paper, we have tried to estimate both Seignorage and welfare cost of inflation simultaneously. To do so, we have used Sidrauski-type model that in this model preference are separable functions of non-durable goods consumption and monetary holdings. From the practical aspects, this model is converted to nonlinear system of simultaneous equations; that should be estimated by using Generalized Method of Moments (GMM). Our empirical results indicated that, Seignorage does not exceed 2.74 percent of GDP and welfare costs of inflation increases with inflation. Maximum Seignorage is related to the year of 1372 and is equal to 2.675 percent of GDP and maximum welfare costs is about 3.041 percent of GDP and is related to the year of 1372.