Government financing, inflation, and the financial sector

Bernardino Adão, Andre C. Silva

Research output: Working paper

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We calculate the effects of an increase in government spending financed with labor income taxes or inflation. We consider government spending in the form of government consumption or transfers. We use a model in which agents increase the use of financial services to avoid losses from inflation, as empirically the financial sector increases with inflation. The financial sector size is constant in standard cash-in-advance models, which implies optimal positive inflation. We reverse this result when we take into account the increase in the financial sector. In our framework, it is optimal to use taxes to finance the government. This result is robust to alternative specifications and definitions of seigniorage and government spending.
Original languageEnglish
Number of pages32
Publication statusPublished - Jan 2018

Publication series

NameFEUNL Working Paper Series
PublisherNova School of Business and Economics


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