The Inflation Tax in Developing Countries 1

The concept of the inflation tax is best described initially by the following quotation from Harry Johnson:

In order to maintain its real balances constant in the face of inflation, the public must accumulate money balances at a rate equal to the inflation; this accumulation of money balances in order to preserve real balances is achieved at the cost of sacrificing the consumption of current real income in order to maintain real balances intact, the release of current real income constituting the equivalent of a ‘tax’ on the holders of real balances; the tax on real balances, in turn, accrues as revenue to the beneficiaries of the inflationary increase in the money supply. [ Johnson, 1967, Ch. III .]