Regime-switching properties of the optimal seigniorage hypothesis: The case of Taiwan

The optimal seigniorage hypothesis argues that the government will attempt to minimize the sum of social costs arising from the rate of inflation and taxation, which results in the testable prediction that inflation and rate of tax revenue will be positively correlated. This article empirically examines the regime-switching properties of this theory. Using quarterly data from Taiwan over 1961-2000 sampling periods, it finds that the optimal seigniorage hypothesis is weakly supported, and its explanatory power for the long-run inflation behaviour is weak.