Money, Banks, and Seigniorage

This chapter offers an in-depth analysis of bank seigniorage, a subject that has received scant attention in existing literature, despite its significant implications for the economy. It highlights the insufficient examination of how banks, as money creators, derive seigniorage and the subsequent effects on aggregate output, price levels, and resource distribution. Utilizing both a general aggregate production function and a multi-sector model, the chapter analyzes how seigniorage extraction influences equilibrium prices and labor utilization, ultimately reshaping economic behavior and welfare distribution. The analysis reveals the intricate relationships among bank seigniorage, capital-labor dynamics, and income distribution between different sectors such as households, firms, and banks. Furthermore, the chapter aligns its findings with broader political-economy implications, offering policy recommendations aimed at ameliorating the adverse impacts of seigniorage. In doing so, it contributes to a more nuanced understanding of the complexities surrounding bank seigniorage, suggesting pathways for future empirical investigation and enhanced monetary policy frameworks.