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Seigniorage

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  • Willem H. Buiter

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12919.

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Date of creation: Feb 2007
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Publication status: published as Buiter, Willem H., 2007. "Seigniorage," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(10).
Handle: RePEc:nbr:nberwo:12919

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  1. 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.
  2. Kiguel, M.A., 1993. "Seigniorage and Inflation: the Case of Argentina," Papers, Southern California - Department of Economics 9312, Southern California - Department of Economics.
  3. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(2), pages 583-603, May.
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  7. Buiter, Willem H, 2004. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4202, C.E.P.R. Discussion Papers.
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  9. 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, Institute of Economic Research, Hitotsubashi University d05-96, Institute of Economic Research, Hitotsubashi University.
  10. 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, Royal Economic Society, vol. 113(490), pages 723-746, October.
  11. 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, Royal Economic Society, vol. 115(502), pages C1-C31, 03.
  12. 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, Springer, vol. 2(2), pages 189-200, November.
  13. Eid, Jean & Overman, Henry G. & Puga, Diego & Turner, Matthew A, 2007. "Fat City: Questioning the Relationship Between Urban Sprawl and Obesity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6191, C.E.P.R. Discussion Papers.
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  18. 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, Institute for Fiscal Studies, vol. 25(3), pages 249-277, September.
  19. Flandreau, Marc, 2007. "Pillars of Globalization: A history of monetary policy targets, 1797-1997," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6252, C.E.P.R. Discussion Papers.
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  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, C.E.P.R. Discussion Papers 4001, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Buiter, Willem H, 2008. "Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6639, C.E.P.R. Discussion Papers.
  2. Giorgio Gobbi & Roberta Zizza, 2007. "Does the underground economy hold back financial deepening? Evidence from the Italian credit market," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 646, Bank of Italy, Economic Research and International Relations Area.
  3. Nicholas Oulton, 2007. "Jeremy Greenwood and Per Krusell, "growth accounting with investment-specific technological progress: a discussion of two approaches" a rejoinder," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19710, London School of Economics and Political Science, LSE Library.
  4. Nicholas Oulton, 2007. "Chain Indices of the Cost of Living and the Path-Dependence Problem: An Empirical Solution," CEP Discussion Papers, Centre for Economic Performance, LSE dp0797, Centre for Economic Performance, LSE.
  5. Stracca, Livio, 2007. "Should we take inside money seriously?," Working Paper Series, European Central Bank 0841, European Central Bank.
  6. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Protection for Sale Made Easy," CEP Discussion Papers, Centre for Economic Performance, LSE dp0800, Centre for Economic Performance, LSE.
  7. Buiter, Willem H, 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6827, C.E.P.R. Discussion Papers.
  8. Eran Yashiv, 2007. "The Beveridge Curve," CEP Discussion Papers, Centre for Economic Performance, LSE dp0807, Centre for Economic Performance, LSE.

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