ABSTRACT
This chapter describes the relevant factors in understanding whether inflation rates are efficient outcomes for the transitional economies. The optimal inflation rate is influenced strongly by three factors: the elasticity of money demand; the efficiency of the tax system; and the strength of the uncertainty effects of inflation in retarding growth. The output term is usually ignored in high-inflation countries as dominated by movements in expected inflation. The impact of the income effects of inflation reach to the government's own budget. The reductions in income reduce the income base on which the government can collect income taxes and decrease even further the demand for base money. The chapter examines the factors relevant for determining the optimal inflation rate in the transitional economies. It considers the peculiar cases of the Commonwealth of Independent States countries, where there were dual currencies in circulation and a division of seigniorage revenues with the Central Bank of Russia.
