Maximization Of Seigniorage And The Rate Of Inflation In China

As a way of financing the deficit of the government, one of the direct negative effects of seignoirage is that it may bring high-inflation. Our government had once acquired considerable seignoirage without super-inflation but a moderate one at the meantime compared to other countries with the similar seignoirage scale. As the constant changing of people’s behavior of holding money, the space for government to fiance the deficit with the use of seignoirage is declining. Blindly Chasing the seignoirage may bring the ever-speeding inflation. What’s more, many countries have been searching ways to iron the economy since the finance crisis, seignoirage as a macro-controlling method is on the agenda. Under the circumstances it is necessary to define the actual space and the possible inflation effects of using seignoirage as a macro-regulating way.The assumption of particular money demand function is necessary to deduce the laffer curve of seignoirage and inflation. Since the money demand function is the key of analysis, this paper started from the micro-angle and combined MIU model to re-construct the country’s money demand function. At the same time the paper apply the bound testing theory to deal with the model with the mix of first order and stationary series. When analysis the money demands at particular period, we try to include the monetization of the economy, and finally estimated three money demand function which correspondence to three periods. And because of this we can see the transitions of the inflation that maximizing the seignoirage betterThe main body of the paper beings with analysis of the seignoirage and inflation in the country’s history qualitatively, and based on the discussion gave a guess of the possible existence of laffer curve. After that with the setting of a specified expression of utility function, we deduced cash money demand function on basis of MIU model. And considering the monetization aspects of the1979-1995period, we adjusted the money demand function. Then under the assumption that money demand equates money supply, I use it as a construction condition deduced the expression of inflation which maximizes the seignoirage. Before the Empirical analysis we introduced the bound testing theory. Given the theories discussed and combined the actual economy conditions, we divided the period,1952-2011,into three sub-periods and used the relative data conducting bound testing、 estimating the longtime coefficients of the variables or the money demand functions. The empirical results indicates the obvious rise of the inflation elasticity of money demand, and the income elasticity has a slightly call-back in the third period after a considerable increase during the second period. The paper then reanalysis the relation-ship of inflation and seignoirage and the possible reasons, which lead to a conclusion that the government did cause the high-inflation because of the chasing of seignoirage. And according to the empirical results the inflation of maximizing the seignoirage is already very low, if the goal of economy growth is8%per year, then the yearly inflation should be under4.42%if the government wish is to acquire the maximizing seignoirage without bring ever-speed inflation. At the meantime, the paper advise to include the maximize seignoirage in the consideration of the macro-economy policies.