Uncertainty, Information and the Inflation Tax in Poor Countries

Most literature on the inflation tax considers the effects of inflation occurring at a steady rate and with the perfect foreknowledge of market participants. ¹ To the extent that variability in the inflation rate is discussed, it is usually considered indicative of monetary mismanagement. In this chapter I show that an unpredictable inflation tax may be optimal given the constraints on the revenue-raising powers and expenditure requirements of poor-country governments. This consideration affects the way in which inflation should be used to finance infra-structure, a recurrent topic in Arthur Lewis’s writings most fully explicated in Lewis (1954).