Inflation tax and money essentiality

Abstract

This paper shows that [Journal of Political Economy 91 (1983) 675] infeasibility condition, which is equivalent to say that money is essential, is an empirical question, rather than a theoretical issue. This hypothesis can be tested by using inflation tax data from hyperinflation experiments. Furthermore, we show that even when there is a foreign currency being used as a means of payments, the domestic currency is still essential as long as the elasticity of substitution between the two currencies is less than or equal to one. (C) 2002 Elsevier Science B.V. All rights reserved.