SEIGNIORAGE AND TAX SMOOTHING - TESTING THE EXTENDED TAX-SMOOTHING MODEL

This paper tests the extended tax-smoothing model for 12 industrialize d countries. A key feature of the version of the model utilized here i s that velocity is modeled as a non-stationary process, and not as a c onstant. The evidence is not only that velocity is non-stationary in a ll 12 countries. but also that, when this is allowed for, the testable implications of the theory are rejected. It seems that tax-smoothing considerations have not been significant elements in determining the b ehavior of seigniorage in these countries.