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How long can inflation tax compensate for the loss of government revenue in war economies? Evidence From Burundi Janvier D. Nkurunziza, CSAE, Oxford University WPS/2004-19 Download the Paper (PDF format) - July 15, 2004 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing. ABSTRACT: The paper shows that civil war in Burundi in the 1990s has provoked an unprecedented decline in government revenue. Both foreign aid transfers and revenue from domestic sources dried up, inducing the government to rely more on inflation tax. Using quarterly data covering the period from 1980:1 to 2002:4 to measure the sensitivity of money demand to inflation we find that the long-run semi-elasticity of inflation to real money in circulation trebled between the pre-war to the war period. The remarkable increase of the semi-elasticity translates what is known in the literature as economic agents' "flight from domestic currency", a strategy that limits the government's capacity to use inflation tax to compensate for the loss in more traditional revenue sources. Shedding light on the behaviour of the demand for real money amidst persistent political and economic instability, illustrates the limits of using inflation and money creation as a dependable source of government revenue. SUGGESTED CITATION: Janvier D. Nkurunziza, "How long can inflation tax compensate for the loss of government revenue in war economies? Evidence From Burundi" (July 15, 2004). The Centre for the Study of African Economies Working Paper Series. Working Paper 219. http://www.bepress.com/csae/paper219