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Seignorage in Highly Indebted Developing Countries


  • McPherson, M.F.


Seignorage is the capital gain generated by the creation of reserve money. The literature on seignorage shows that countries with highly developed and deep financial systems generate few resources relative to national income (or government revenue) from seignorage. By contrast, countries with shallow financial systems and profligate governments appear to gain access to large amounts of real resources when they create reserve money. Results obtained in this paper suggest there is no anomaly. Highly indebted developing countries resorting to money creation to finance their activities do not generate large amounts of seignorage, particularly on a sustained basis. In fact, when all of the consequences of rapid reserve money growth are considered --- including the increased local currency cost of servicing and amortizing external debt due to exchange rate depreciation --- these countries incur a net loss from reserve money creation.

Suggested Citation

  • McPherson, M.F., 1999. "Seignorage in Highly Indebted Developing Countries," Papers 696, Harvard - Institute for International Development.
  • Handle: RePEc:fth:harvid:696

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    References listed on IDEAS

    1. Chen, B.-L. & Lin, C.-F. J. & Yang, X., 1999. "Empirical Evidence for the Endogenous Growth Generated by Evolution in Division of Labor," Papers 671, Harvard - Institute for International Development.
    2. Lee, Jong-Wha & Barro, Robert J, 2001. "Schooling Quality in a Cross-Section of Countries," Economica, London School of Economics and Political Science, vol. 68(272), pages 465-488, November.
    3. Dennis, Benjamin & Kandel, Simon, 2000. "Holding Out for a Haircut: Financial Crisis, Moral Hazard, and Interest Rate Policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(3), pages 233-249, July.
    4. Glenn Jenkins & HENRY LIM & GANGADHAR SHUKLA, 1999. "Evaluation Of An Expansion Of The Electricity Transmission System In Mexico," Development Discussion Papers 1999-05, JDI Executive Programs.
    5. Khoo, L. & Dennis, B., 1999. "Income Inquality, Fertility Choice, and Economic Growth: Theory and Evidence," Papers 687, Harvard - Institute for International Development.
    6. MIGARA JAYAWARDENA & Glenn Jenkins & GANGADHAR SHUKLA, 1999. "Control Of Water And Coastal Pollution An Appraisal For Espirito,Brazil," Development Discussion Papers 1999-04, JDI Executive Programs.
    7. Glenn Jenkins & HENRY LIM, 1998. "Evaluation Of Investments For The Expansion Of An Electricity Distribution System," Development Discussion Papers 1998-01, JDI Executive Programs.
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    Cited by:

    1. Jovis Wolfe Bellot, . "The Stability of the Demand for Broad Money in Argentina in the Post-Financial Liberalization Period," Fordham Economics Dissertations, Fordham University, Department of Economics, number 2002.2.

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    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt


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