Beschreibung:
We analyze the effects of present bias on the deficit and inflation when the government finances the deficit using a seigniorage tax. We also examine how introducing present bias affects the welfare implications of the deficit in the long run. For this, we consider a three-period monetary overlapping generations (OLG) model with quasi-hyperbolic discounting preferences. We show that to finance a certain deficit level, the government should raise the seigniorage tax under present bias since the temptation of current consumption decreases aggregate money holdings. Thus, a higher inflation rate is observed in the hyperbolic discounting economy. We also demonstrate that the maximum sustainable deficit level at a steady state is lower in the hyperbolic discounting economy. Lastly, our local welfare analysis shows that the welfare cost of the deficit is higher for hyperbolic discounting consumers