Monetary Dynamics, Growth, and the Efficiency of Inflationary Finance

Abstract

One of the main arguments against government expansion of the money stock at a high rate to finance expenditures is based on the social cost of wealth redistribution and economic disruption caused by unanticipated inflation.l Another argument is based on the excess burden of inflation as a tax on real cash balances. This latter social cost was analyzed for hyperinflation in a stationary economy by Martin Bailey in 1956 [2] . Bailey's classic analysis examined the efficiency of inflationary finance (in comparison to alternative sources of revenue) in alternative static-equilibrium situations without allowing for the effects on the excess burden or the revenue flow of dynamic adjustments of real balances and the rate of inflation in the transition from one static equilibrium to another. One

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