Inflation and Seigniorage-Financed Fiscal Deficits: The Case of Mexico

Moloche, Guillermo (2024): Inflation and Seigniorage-Financed Fiscal Deficits: The Case of Mexico.

Abstract

In this study, the author demonstrates that the selection of an appropriate money-demand function is crucial to ascertain the relationship between fiscal deficits and inflation. To do so, the author incorporates a Selden-Latané money-demand function into a micro-founded extension of the model introduced by Sargent, Williams, and Zha (2009). The use of this particular function results in a model that more accurately replicates Mexican money supply's past history, and furthermore, establishes a stronger historical association between fiscal and monetary policy, namely, between fiscal deficits and seigniorage. As a result, the author is able to provide more compelling evidence for the dominance of fiscal policy as the major cause of high inflation in Mexico during the last three decades of the twentieth century.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation, Seigniorage, Fiscal Deficits, Monetary and Fiscal Policy Interaction
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy

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