Fiscal Revenue, Inflationary Finance and Growth

IMF Working Papers, March 1, 1992

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Fiscal Revenue, Inflationary Finance and Growth

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Bibliographic details

• Authors: Nurun N. Choudhry
• Published: March 1, 1992
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451921069.001

Core findings

• The paper analyzes the optimal rate of monetary expansion when government resorts to inflationary finance to generate additional investment for enhancing growth.
• If there are lags in tax collection, an increase in inflation erodes real fiscal revenue, thereby worsening the current balance while reducing government investment.
• Reduced government investment impedes capital accumulation and increases the welfare cost of inflation.
• As a result, compared with a scenario without collection lags:
  • The optimal rate of monetary expansion is lower.
  • The equilibrium capital-labor ratio is lower.
  • Output is lower.
  • The marginal cost of inflationary finance is higher.
• Simulations are performed to highlight empirical implications.

Analysis and mechanisms

• Tax collection lags create a revenue-eroding effect whereby inflation reduces the real value of taxes collected over time.
• The revenue-eroding effect leads to a deterioration of the current balance, forcing down government-funded investment intended to boost capital formation.
• Lower government investment translates into slower capital accumulation and a lower shadow price of capital, raising the welfare cost associated with inflation.
• Inflationary finance therefore has a higher marginal cost in the presence of tax collection lags, altering optimal monetary expansion policy.

Simulations and empirical implications

• Simulations are conducted to illustrate the empirical implications of the model’s mechanisms (details of simulation results are reported in the paper).

Publication and metadata

• Author: Nurun N. Choudhry
• Date: March 1, 1992
• Pages: 30
• Volume: 1992
• Issue: 023
• Series: Working Paper No. 1992/023
• DOI: https://doi.org/10.5089/9781451921069.001
• Stock No: WPIEA0231992
• ISBN: 9781451921069
• ISSN: 1018-5941
• Subjects: Capital productivity, Consumption, Government debt management, Inflation, Monetary expansion, Monetary policy, National accounts, Prices, Production, Public financial management (PFM)
• Keywords: capital formation, Capital productivity, Consumption, effects of inflation, Government debt management, Inflation, inflation expectation, inflation rate, inflation revenue, Monetary expansion, revenue ratio, revenue-eroding effect, shadow price, shadow price of capital, welfare cost of inflation, WP

IMF Working Paper — Nurun N. Choudhry, March 1, 1992.