ECON 3580 Lecture Notes - Lecture 20: Seigniorage, Moral Hazard, Black Market
17 Jul 2018
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Document Summary
Characteristics of poor countries: unsustainable macroeconomic policies that cause high inflation and unstable output and employment. If governments cannot pay for debts through taxes, they can print money to finance debts. Seigniorage is paying for real goods and services by printing money. High inflation reduces the real cost of debt that the government has to repay and reduces the real value of repayments for lenders. High and variable inflation is costly to society; unstable output and employment is also costly: lack of financial markets that allow transfer of funds from savers to borrowers, weak enforcement of economic laws and regulations. Weak enforcement of property rights makes individuals and institutions less willing to invest in production processes and makes savers less willing to lend to investors/borrowers. Weak enforcement of bankruptcy laws and loan contracts makes savers less willing to lend to borrowers/investors.
