A Note on Seigniorage: Implications for a Modern Independent Central Bank System

In a modern central bank system in which the government and the central bank are separate entities, seigniorage arises from the interest margin between the central bank’s assets and liabilities. However, the misconception that seigniorage is equivalent to the difference between the face value of banknotes and their production costs remains widespread. This paper clarifies the concept of seigniorage in modern central banks, which is derived from the interest spread between the central bank’s assets and liabilities, and verifies this point by examining the Bank of Japan’s balance sheet and profit-and-loss statement. Furthermore, by taking into account the fact that the budget constraints of the government and the central bank are separate, a consideration not reflected in standard macroeconomics textbooks, I confirm that seigniorage as an interest spread can be derived. In this sense, the concept of seigniorage can vary depending on the institutional design of currency issuance. Given that central banks will continue to conduct monetary policy with large balance sheets in the future, it is important to discuss the relationship between central bank finances and monetary policy management, grounded in an accurate understanding of seigniorage.