Seigniorage Revenue, Inflation Tax and Indian Economy: A Cointegration Analysis

Abstract

The aim of this paper is to test the relationship between seigniorage revenue, inflation tax and interest rates for Indian Economy. For this purpose, we estimate the Mankiw’s optimal seigniorage model by using time series dataset for the time period 1970-2015 for Indian Economy with the cointegration and vector error correction methods (VECM). According to estimated econometric results, there is a significant relationship between inflation, nominal interest rates and tax revenue in the long run. However, in short run there is a causality relationship from nominal interest rates and inflation to tax revenue and tax revenue to nominal interest rates. Thus, this study suggests that in the long run higher tax rates are associated with lower inflation rates and lower nominal interest rates for Indian Economy