Debt, Cash Flow and Inflation Incentives:
A Swedish Example

by

Mats Persson, Torsten Persson, Lars E.O. Svensson
Institute for International Economic Studies, Stockholm University

Final Version: May 13, 1996

 

Abstract

The fiscal gains from, and hence the political incentives to, an increase in inflation rate of ten percentage points may be substantial: with Swedish data from 1994, these gains would have been an annual real flow of 3-4 percent of GDP, or a capitalized value of nearly 100 percent of GDP. They would mainly have arisen from the nominalistic features of the tax and transfer systems rather than from the traditional sources: seignorage and real depreciation of the public debt. The welfare costs of such an inflation increase would have been even larger, however, and would thus have reduced net welfare. Possible institutional reforms, aimed at making the political costs of inflation more equal to the social costs, are presented and discussed.

Keywords: Inflation, Gains, Inflation Costs, Public Debt

JEL Classification: E31, E62, H62, H63