Currency Substitution and the Regressivity of Inflationary Taxation

Authors

  • Federico A. Sturzenegger University of California, Los Angeles National Bureau of Economic Research image/svg+xml

Keywords:

inflation tax, currency substitution, financial adaptation, regressivity, income distribution, transactions technology

Abstract

The purpose of this paper is to show that in the presence of financial adaptation or currency substitution, the inflation tax is extremely regressive. This regressivity arises from the existence of a fixed cost of switching to inflation-proof transactions technologies. This fixed cost makes it optimal only for those agents with sufficiently high incomes to switch out of domestic currency. The effects are illustrated and quantified for a particular case.

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References

Calvo, G. A. (1985). Currency substitution and the real exchange rate: The utility maximization approach. Journal of International Money and Finance, 4(2), 175–188.

De Pablo, J. C. (1991, julio). Medio año de cavallonomía. Contexto, La «Newsletter» de Juan Carlos de Pablo, (100, suplemento).

Dornbusch, R., Sturzenegger, F., & Wolf, H. (1990). Extreme inflation: Dynamics and stabilization. Brookings Papers on Economic Activity, 1990(2), 1–83.

Fischer, S. (1982). Seigniorage and the case for a national money. Journal of Political Economy, 90(2), 295–313. https://doi.org/10.1086/261057

Helpman, E., & Krugman, P. (1986). Market structure and foreign trade. MIT Press.

Labán, R., & Sturzenegger, F. (1991). Social conflict, financial adaptation, and delayed stabilizations [Mimeo]. Massachusetts Institute of Technology.

Prescott, E. (1987). A multiple means-of-payments model. In W. A. Barnett & K. J. Singleton (Eds.), New approaches to monetary economics. Cambridge University Press.

Sturzenegger, F. (1991). Inflation and social welfare in a model with endogenous financial adaptation [Mimeo]. University of California, Los Angeles.

Varian, H. (1984). Microeconomic analysis (2.ª ed.). W. W. Norton.

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Published

1992-04-30

How to Cite

Sturzenegger, F. A. (1992). Currency Substitution and the Regressivity of Inflationary Taxation. Economic Analysis Review, 7(1), 177–192. Retrieved from https://www.rae-ear.org/index.php/rae/article/view/225

Issue

Vol. 7 No. 1 (1992)

Section

Articles

License

Copyright (c) 1992 Federico A. Sturzenegger

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

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