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Seigniorage

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  • Willem Buiter

Abstract

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 mimic Milton Friedman's helicopter drop of money in an economy faced with a liquidity trap.

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  • Willem Buiter, 2007. "Seigniorage," CEP Discussion Papers dp0786, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0786
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    Cited by:

    1. Baldwin, Richard & Robert-Nicoud, Frédéric, 2006. "Protection for Sale Made Easy," CEPR Discussion Papers 5452, C.E.P.R. Discussion Papers.
    2. Yashiv, Eran, 2006. "The Beveridge Curve," IZA Discussion Papers 2479, Institute of Labor Economics (IZA).
    3. Oulton, Nicholas, 2008. "Chain indices of the cost-of-living and the path-dependence problem: An empirical solution," Journal of Econometrics, Elsevier, vol. 144(1), pages 306-324, May.
    4. Giorgio Gobbi & Roberta Zizza, 2007. "Does the Underground Economy Hold Back Financial Deepening? Evidence from the Italian Credit Market," CEP Discussion Papers dp0789, Centre for Economic Performance, LSE.
    5. Willem H. Buiter, 2010. "Economic, Political and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council," Chapters, in: Ronald MacDonald & Abdulrazak Al Faris (ed.), Currency Union and Exchange Rate Issues, chapter 3, Edward Elgar Publishing.
    6. Pavel Trunin & Sergey Narkevich, 2013. "Prospects for the Russian Ruble to Become Regional Reserve Currency," Working Papers 118, Gaidar Institute for Economic Policy, revised 2015.
    7. Stracca, Livio, 2007. "Should we take inside money seriously?," Working Paper Series 841, European Central Bank.
    8. Oulton, Nicholas, 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 19710, London School of Economics and Political Science, LSE Library.
    9. Buiter, Willem H., 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
    10. Narkevich, Siarhei & Trunin, Pavel, 2013. "Prospects for the Russian Ruble as a Regional Reserve Currency," Published Papers dok2, Russian Presidential Academy of National Economy and Public Administration.
    11. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.

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    More about this item

    Keywords

    inflation tax; central bank budget constraint; coordination of monetary and fiscal policy;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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