| Sumario: | The restrictions implied by an intertemporal optimizing model on the time path of the inflation tax were derived and tested. Unlike previous research on inflation-tax smoothing, the welfare loss from inflation, the money demand function, and the time path of the rate of inflation were jointly derived under the assumption that the policy maker attempted to maximize the welfare of the representative individual. The model was applied to quarterly data for Argentina (1973:4-1986:4), Brazil (1975:4-1988-2), and Israel (1971:1-1988:3). Although the model's overidentifying restrictions were not rejected by the data for most of the specifications considered, several data points were found that do not satisfy the model's postulates. These are observations that feature inflation rates that are excessively high from the perspective of government's optimal policy under precommitment. Possible explanations for these observations are discussed.
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