A political economy model of monetary policy: decentralized decision making and competition for seigniorage
Abstract
A political economy model is developed to provide a rationale of monetary policy
in high inflation regimes, such as the Brazilian experience until the advent of the Plano Real.
Decision making of monetary policy is assumed to be decentralized, where several decision-
-makers competitively determine the quantity of money. It is shown that equilibrium inflation
is higher than under the alternative monetary regime where decision making is centralized at
the Central Bank. An important additional feature of this political economy model is that it
does not rely on time-inconsistency to generate high and sub-optimal inflation.
JEL Classification: E52; G21; H21.
Keywords: New political economy monetary policy inflation taxation seigniorage