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  • Willem H. Buiter

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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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
Date of revision:
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
Note: IFM ME
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  1. Andrew B. Bernard & Stephen Redding & Peter K. Schott, 2006. "Multi-product firms and trade liberalization," LSE Research Online Documents on Economics 3684, London School of Economics and Political Science, LSE Library.
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  7. Willem H. Buiter, 2003. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," NBER Working Papers 10163, National Bureau of Economic Research, Inc.
  8. Willem H. Buiter, 1990. "Principles of Budgetary and Financial Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524139, June.
  9. King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January.
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  11. Rachel L. Ngai, 2007. "An R&D-based Model of Multi-sector Growth," 2007 Meeting Papers 349, Society for Economic Dynamics.
  12. James Tobin & Willem H. Buiter, 1974. "Long Run Effects of Fiscal and Monetary Policy on Aggregate Demand," Cowles Foundation Discussion Papers 384, Cowles Foundation for Research in Economics, Yale University.
  13. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 583-603, May.
  14. 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, vol. 113(490), pages 723-746, October.
  15. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
  16. Eid, Jean & Overman, Henry G. & Puga, Diego & Turner, Matthew A., 2008. "Fat city: Questioning the relationship between urban sprawl and obesity," Journal of Urban Economics, Elsevier, vol. 63(2), pages 385-404, March.
  17. 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, vol. 2(2), pages 189-200, November.
  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, vol. 25(3), pages 249-277, September.
  19. 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, vol. 115(502), pages C1-C31, 03.
  20. Flandreau, Marc, 2007. "Pillars of Globalization: A history of monetary policy targets, 1797-1997," CEPR Discussion Papers 6252, C.E.P.R. Discussion Papers.
  21. Anand, Ritu & van Wijnbergen, Sweder, 1989. "Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey," World Bank Economic Review, World Bank Group, vol. 3(1), pages 17-38, January.
  22. M. Fase, 2005. "On Economics and Religion," De Economist, Springer, vol. 153(1), pages 85-106, December.
  23. 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 d05-96, Institute of Economic Research, Hitotsubashi University.
  24. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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