Democracy, Dictatorship, and the Monetary Commons

In this paper, we analyze the e ect that alternative decision-making structures have on equilibrium in ation rates. Our analysis considers four scenarios: strong dictatorship, weak dictatorship, strong democracy and weak democracy. Each scenario implies different ownership structures over the real value of the money stock, which we treat as a common pool resource. We find that the equilibrium inflation rate that emerges under strong dictatorship and strong democracy is consistent with the revenue-maximizing rate, while the rate that emerges under weak dictatorship or weak democracy exceeds the revenue-maximizing rate. In other words, when political property rights over the real value of the money stock are ill-defined, there is a tragedy of the monetary commons. Our analysis explains why inflation rates are lower in more democratic countries and those that experience lower bouts of political instability.