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The macroeconomic implications of deficit financing under present bias

Kim, Eungsik
; 
Lee, Donghyun
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Abstract
We examine how present bias affects deficit, inflation, and welfare in an economy where the deficit is funded by a seigniorage tax. In a hyperbolic discounting economy, reduced money holdings due to the desire for immediate consumption cause a decline in the sustainable deficit limit. To meet the targeted deficit, the government must raise seigniorage tax collection, especially with present bias. This results in increased inflation rates and higher welfare costs associated with the deficit for hyperbolic discounting individuals.
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Date
2023-06-30
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Elsevier
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Economics Scholarly Works
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Keywords
Quasi-hyperbolic discounting, Government deficit, Inflation, Welfare
Citation
Kim, E., Lee, D., (2023), The macroeconomic implications of deficit financing under present bias, Economics Letters, vol. 230, 111240, https://doi.org/10.1016/j.econlet.2023.111240
URI
https://hdl.handle.net/1808/34709
DOI
10.1016/j.econlet.2023.111240
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