In countries with high rates of inflation there is typically movement away from the use of the local currency. The paper analyzes the costs and benefits of using a local currency, with emphasis on the seigniorage foregone by using a foreign money. Even if it should be desirable for a country to fix its exchange rate, it still loses seigniorage if it does not use its own money. The case for using a foreign money then turns largely on the superior discipline imposed on domestic policymakers by removing their control over the money supply. Alternative methods of imposing discipline are discussed. Estimates of the amount of seigniorage raised by different governments are presented; seigniorage amounts in some cases to about 10 percent of government revenue. Estimates are also presented of both the annual flow and one-time stock costs of giving up use of domestic currencies and instead using the dollar. The flow cost is typically about 1 percent of GNP and the stock cost is around 10 percent of GNP.

This paper examines the responses of the capital stock, output, and the price level to changes in the money stock in a neoclassical growth model in which money may not be neutral. The nonneutrality of money stems from the Tobin effect--the effect of anticipated inflation on capital accumulation. The adjustment of prices and output to monetary changes is shown not only to depend on whether the change is anticipated or not but also on the date at which the change first is anticipated. Adjustment patterns to anticipated changes show first Koyck leads and then Koyck lags. The model is extended to include labor supply effects of unanticipated inflation in Section XI. The paper concludes with discussions of the nature of the rational expectations solution chosen and of the mechanism producing the nonneutrality of money.

This paper examines the responses of the capital stock, output, and the price level to changes in the money stock in a neoclassical growth model in which money may not be neutral. The nonneutrality of money stems from the Tobin effect--the effect of anticipated inflation on capital accumulation. The adjustment of prices and output to monetary changes is shown not only to depend on whether the change is anticipated or not but also on the date at which the change first is anticipated. Adjustment patterns to anticipated changes show first Koyck leads and then Koyck lags. The model is extended to include labor supply effects of unanticipated inflation in Section XI. The paper concludes with discussions of the nature of the rational expectations solution chosen and of the mechanism producing the nonneutrality of money.

The paper is concerned with the role of monetary policy and argues that activist monetary policy can affect the behavior of real output, rational expectations notwithstanding. A rational expectations model with overlapping labor contracts is constructed, with each labor contract being made for two periods. These contracts inject an element of short-run wage stickiness into the model. Because the money stock is changed by the monetary authority more frequently than labor contracts are renegotiated, and, given the assumed form of the labor contracts, monetary policy has the ability to affect the short-run behavior of output, though it has no effects on long-run output behavior.

The paper is concerned with the role of monetary policy and argues that activist monetary policy can affect the behavior of real output, rational expectations notwithstanding. A rational expectations model with overlapping labor contracts is constructed, with each labor contract being made for two periods. These contracts inject an element of short-run wage stickiness into the model. Because the money stock is changed by the monetary authority more frequently than labor contracts are renegotiated, and, given the assumed form of the labor contracts, monetary policy has the ability to affect the short-run behavior of output, though it has no effects on long-run output behavior.

The demand for index bonds by households is studied in an inter-temporal optimization model in which households can choose a portfolio consisting of equity, nominal bonds, and index bonds. The rate of inflation is uncertain. In a setting where all income is from capital gains, it is shown that index bonds command a premium over nominal bonds only if equity is not a hedge against inflation; it is also shown that, if there are homogeneous expectations and no outside bonds, all lending and borrowing will be through index bonds with no nominal bonds existing. These conclusions are modified when individuals have income from human capital. The very stringent conditions under which a single index bond provides the household with the same utility as a full set of futures markets are examined in a model with many consumption goods.

A given amount of seigniorage revenue can be collected at either a high or a low rate of inflation. Thus there ray be two equilibria when a government finances its deficit by printing money--implying that an economy may be stuck in a high inflation equilibrium when, with the same fiscal policy, it could be at a lower inflation rate. We show that under rational expectations the high inflation equilibrium is stable and the low inflation equilibrium unstable; under adaptive expectations or lagged adjustment of money balances with rational expectations, it may be the low inflation equilibrium that is stable. Extending the model to allow for bond as well as money financing of deficits, we show that one of the equilibria disappears if the government sets a nominal anchor for the economy, for instance by fixing the growth rate of money. The dual equilibria and their stability.