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Abstract
This paper develops a dynamic model of seigniorage in which economies' equilibrium paths
reflect the ongoing strategic interaction between an optimizing government and a rational
public. The model extends existing positive models of monetary policy and inflation by
explicitly incorporating the intertemporal linkages among budget deficits, debt, and inflation.
A central finding is that the public's rational responses to government policies may well create
incentives for the government to reduce inflation and the public debt over time. A sufficiently
myopic government may, however, provoke a rising equilibrium path of inflation and public
debt.