Seigniorage and conventional taxation with multiple exogenous shocks

The correlation between seigniorage and conventional taxation is investigat ed in a dynamic optimizing model which contains three shocks (to government expenditure and to the deadweight losses associated with conventional taxa tion and seigniorage), asymmetric costs of adjusting revenue, and potential absence of the availability of debt. Solutions and impulse response functi ons from the theoretical model are used to construct a three-variable struc tural vector autoregression (VAR) and identify the empirical reduced-form V AR. Judged by the parameter estimates, empirical impulse response functions , forecast error variance decompositions, and historical decompositions of the time series, identification is successful and the econometric results a re supportive of the theoretical model, (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: E5; E6.