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03 Jul 2008 05:22 pm
The Zimbabwe Paper Trade
Tyler Cowen on the Munich-based company that supplies Zimbabwe with bank notes being pressured to stop dealing with Mugabe:
The deeper question is why any tyrannical government would find such a high inflation rate to be seigniorage-maximizing. At some point people simply abandon the currency or prices end up rising as fast or faster than the government spends the newly printed money. (Related query: When the number "quadrillion" is in play, are the "anti-forgery" features of the paper really needed? Isn't the value of the bill higher as paper in any case?) Under one hypothesis, the time horizon is very short and the mass printing of bills maximizes seigniorage on a week-to-week basis but not overall. Under another hypothesis, seigniorage is declining (given price expectations), but without the stream of new bills it would be declining even more rapidly.
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