Advanced Macro & Growth · advanced
What moves on the Government Budget Constraint & Seigniorage diagram
Flight from money shrinks the seigniorageseigniorageGovernment revenue from printing money, an implicit tax paid through inflation. base, collapsing the Laffer curve. A deficit that once had a stable financing point may now have none: hyperinflation.
The inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. tax is levied on the money people hold.
InflationinflationA sustained rise in the overall price level, eroding money's purchasing power. grinds on and citizens switch to dollars, crypto, and barter: the tax base flees.
The whole revenue hill collapses inward: every inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. rate now raises less.
If the deficit line clears the shrunken peak, no inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. rate can finance it. That is the doom loop of Zimbabwe and Venezuela: printing faster while raising less.
Examiners ask this as: dollarization, currency flight, hyperinflation, zimbabwe, venezuela.
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