Seigniorage and tax smoothing in the United States 1914–1986

Abstract

When monetary and fiscal authorities cooperate to minimize the distortionary costs of financing an exogenous stream of government expenditures, Barro's tax-smoothing model implies a long-run relationship between tax revenues and inflation. Previous empirical tests of this relationship are reinterpreted in light of recent work on cointegration and are shown to hold only when stochastic temporal variation in the excess burden of taxes and seigniorage is transitory in nature. A new test that holds in the presence of nonstationary disturbances is developed and applied. Annual U.S. data from the period 1914 to 1986 reject the revenue-smoothing hypothesis.