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Seigniorage

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  • Buiter, Willem H.

Abstract

Governments through the ages have appropriated real resources through the monopoly of the "coinage". In modern fiat money economies, the monopoly of the issue of legal tender is generally assigned to an agency of the state, the Central Bank, which may have varying degrees of operational and target independence from the government of the day. In this paper I analyse four different but related concepts, each of which highlights some aspect of the way in which the state acquires command over real resources through its ability to issue fiat money. They are (1) seigniorage (the change in the monetary base), (2) Central Bank revenue (the interest bill saved by the authorities on the outstanding stock of base money liabilities), (3) the inflation tax (the reduction in the real value of the stock of base money due to inflation and (4) the operating profits of the central bank, or the taxes paid by the Central Bank to the Treasury. To understand the relationship between these four concepts, an explicitly intertemporal approach is required, which focuses on the present discounted value of the current and future resource transfers between the private sector and the state. Furthermore, when the Central Bank is operationally independent, it is essential to decompose the familiar consolidated ?government budget constraint? and consolidated ?government intertemporal budget constraint? into the separate accounts and budget constraints of the Central Bank and the Treasury. Only by doing this can we appreciate the financial constraints on the Central Bank?s ability to pursue and achieve an inflation target, and the importance of cooperation and coordination between the Treasury and the Central Bank when faced with financial sector crises involving the need for long-term recapitalisation or when confronted with the need to mimick Milton Friedman?s helicopter drop of money in an economy faced with a liquidity trap. --

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2007-10
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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 1 (2007)
Issue (Month): 10 ()
Pages: 1-49

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Handle: RePEc:zbw:ifweej:5806

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Keywords: inflation tax; central bank budget constraint; coordination of monetary and fiscal policy;

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References

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  1. Goodfriend, Marvin, 2000. "Overcoming the Zero Bound on Interest Rate Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1007-35, November.
  2. Stephen J Redding & Peter K Schott & Andrew B Bernard, 2007. "Multi-product Firms and Trade Liberalization," 2007 Meeting Papers 44, Society for Economic Dynamics.
  3. Friedman, Milton, 1971. "Government Revenue from Inflation," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 846-56, July-Aug..
  4. Willem Buiter, 2005. "Overcoming the zero bound on nominal interest rates: Gesell’s currency carry tax vs. Eisler’s parallel virtual currency," International Economics and Economic Policy, Springer, vol. 2(2), pages 189-200, November.
  5. Wilem H. Buiter, 2005. "Overcoming the Zero Bound on Nominal Interest Rates: Gesell's Currency Carry Tax vs. Eisler's arallel Virtual Currency," Hi-Stat Discussion Paper Series d05-96, Institute of Economic Research, Hitotsubashi University.
  6. L. Rachel Ngai & Roberto M. Samaniego, 2006. "An R&D-Based Model of Multi-Sector Growth," CEP Discussion Papers dp0762, Centre for Economic Performance, LSE.
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  8. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 583-603, May.
  9. Kiguel, M.A., 1993. "Seigniorage and Inflation: the Case of Argentina," Papers 9312, Southern California - Department of Economics.
  10. Thomas J. Sargent, 1982. "The Ends of Four Big Inflations," NBER Chapters, in: Inflation: Causes and Effects, pages 41-98 National Bureau of Economic Research, Inc.
  11. Flandreau, Marc, 2007. "Pillars of Globalization: A history of monetary policy targets, 1797-1997," CEPR Discussion Papers 6252, C.E.P.R. Discussion Papers.
  12. Buiter, Willem H, 2004. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," CEPR Discussion Papers 4202, C.E.P.R. Discussion Papers.
  13. James Tobin & Willem H. Buiter, 1974. "Long Run Effects of Fiscal and Monetary Policy on Aggregate Demand," Cowles Foundation Discussion Papers 384, Cowles Foundation for Research in Economics, Yale University.
  14. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
  15. Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping hyperinflations past and present," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 122(1), pages 1-47, March.
  16. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  17. Willem H. Buiter & Nikolaos Panigirtzoglou, 2003. "Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution," Economic Journal, Royal Economic Society, vol. 113(490), pages 723-746, October.
  18. M. Fase, 2005. "On Economics and Religion," De Economist, Springer, vol. 153(1), pages 85-106, December.
  19. Willem H. Buiter, 1990. "Principles of Budgetary and Financial Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524139, December.
  20. Willem H. Buiter, 2004. "Two Naked Emperors? Concerns about the Stability & Growth Pact and Second Thoughts about Central Bank Independence," Fiscal Studies, Institute for Fiscal Studies, vol. 25(3), pages 249-277, September.
  21. Anand, Ritu & van Wijnbergen, Sweder, 1989. "Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey," World Bank Economic Review, World Bank Group, vol. 3(1), pages 17-38, January.
  22. Buiter, Willem H, 2003. "Two Naked Emperors? Concerns about the Stability and Growth Pact and Second Thoughts About Central Bank Independence," CEPR Discussion Papers 4001, C.E.P.R. Discussion Papers.
  23. King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January.
  24. Willem H. Buiter, 2005. "New Developments in Monetary Economics: Two ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos," Economic Journal, Royal Economic Society, vol. 115(502), pages C1-C31, 03.
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Citations

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Cited by:
  1. Eran Yashiv, 2007. "The Beveridge Curve," CEP Discussion Papers dp0807, Centre for Economic Performance, LSE.
  2. Nicholas Oulton, 2007. "Jeremy Greenwood and Per Krusell, "Growth Accounting with Investment-Specific Technological Progress: A Discussion of Two Approaches" A Rejoinder," CEP Discussion Papers dp0802, Centre for Economic Performance, LSE.
  3. Giorgio Gobbi & Roberta Zizza, 2007. "Does the underground economy hold back financial deepening? Evidence from the Italian credit market," LSE Research Online Documents on Economics 19731, London School of Economics and Political Science, LSE Library.
  4. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Protection for sale made easy," LSE Research Online Documents on Economics 19713, London School of Economics and Political Science, LSE Library.
  5. Willem Buiter, 2008. "Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council," Open Economies Review, Springer, vol. 19(5), pages 579-612, November.
  6. Nicholas Oulton, 2007. "Chain indices of the cost of living and the path-dependence problem: an empirical solution," LSE Research Online Documents on Economics 19718, London School of Economics and Political Science, LSE Library.
  7. Buiter, Willem H, 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
  8. Stracca, Livio, 2007. "Should we take inside money seriously?," Working Paper Series 0841, European Central Bank.

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