A distinct but related concept to seigniorage and central bank revenue is the inflation tax, s3. When inflation is relatively low and interest rates are determined by the market, it is the second, opportunity cost based, concept that makes the most sense. Seigniorage revenue and inflation tax in turkish economy. Seigniorage has also got nothing to do with inflationdeflation, tax, interest or anyting else construed in the article. According to this theory, governments optimally equate the marginal cost of the inflation tax with that of output taxes, thereby minimizing the distortions to the economy when choosing the optimal combination of taxes to finance their expenditures. Inflation and seigniorage in argentina english abstract. Other income sources currently make up the lions share of the ecbs profits, such as the income earned on the asset purchase programme. Seigniorage may serve as a means of paying part of a governments expenses because the new currency can be used to purchase goods and services. Pdf seigniorage and inflation tax in mexico 19852011. Is seigniorage one of the causes of inflation in developing.
A quadratic estimation technique following samimi estimation. Seigniorage income has been falling since 2008, in line with a decline in euro area interest rates. Evidence the theory of optimal seigniorage can be interpreted as prescriptive. Seigniorage as an unlimited source of government revenue. Seigniorage has got nothing to do with gold, as gold has nothing to do with money, this lie is getting very old indeed, at least 5000 years old. The revenuemaximizing steadystate in ation rate an important theoretical concept is the revenuemaximizing steadystate in. By appointing a more conservative central bank, the average inflation will be reduced. This study therefore investigated the seig inflation and confirmed the existence of seigniorage laffer curve in ghana. The third concept of measuring seigniorage applies. Oct 28, 2018 2 empirical findings on political, monetary and fiscal instability. By imposing a mint tax, the mint can extract payment from those seeking to increase. Inflation and seigniorage in argentina ingles resumo. Inflation and seigniorage in argentina english the world bank.
In this regard the rcc faces a choice to maximize seigniorage by increasing the demand for international reserves or to maximize the revenue from inflation or perhaps a third alternative combining both. This paper is concerned with measuring the seigniorage in romania since the fall of communism and the potential gains after passing to euro. It is essentially the profit earned by the government by printing currency. The figure below shows a decline in the inflation tax seigniorage as the inflation increases in pakistan. Essentially, inflation is a form of indirect income tax, since it causes a decline in the purchasing power of the publics income.
May 19, 2014 a distinct but related concept to seigniorage and central bank revenue is the inflation tax, 3s. Korap 2006 have investigated the courses of inflation tax and seigniorage revenue for policy makers of the turkish economy. Moreover, a higher inflation rate or reserve ratio, for instance, has a onetime reallocative effect, causing households to shift from the bank to the nonbank. The government profits at the expense of the consuming public scott, 1997. The main purpose of an inflation tax is financing government expenditures. However, this benefit comes with a cost of higher output and spending deviations. Third, ongoing and proposed financial sector liberalization measureswhile desirable on efficiency groundswill likely have a negative impact on the chinese governments ability to earn seigniorage in the future. The goal of this study is to test the implication of mankivs 1987 optimal seigniorage theory suggesting that in the long run higher tax rates are associated with higher inflation rates and higher nominal interest rates for turkish economy using time series dataset for the time period 19802011. Second and more importantly, the rcc has the power to set the global inflation rate and thereby impose an inflation tax on the rest of the world. Dynamic seigniorage theory university of california. Mar 24, 2020 seigniorage is the difference between the value of money and the cost to produce it in other words, its the economic cost of producing a currency within a given economy or country. In economies with little seigniorage, this cost will be negligible. Zimbabwe has recently experienced record hyperinflation of 80 billion percent a month.
Observe that seigniorage need not equal in ation tax revenue, which is. This paper uses new data from zimbabwe to investigate money demand under hyperinflation using an autoregressive distributedlag model for the period 19802008. If inflation and inflation tax seigniorage are integrated in a graphical form, the figure exhibits the characteristics of a lafer curve. The inflation tax is the reduction in the real value of the stock of base money caused by inflation. The authors think that in the presence of corruption, the use of public finance may result in inflationary effect that leads to higher level of inflation, which in turn affects the whole economy.
Issuing new currency, rather than collecting taxes paid with existing money, is considered a tax on holders of existing currency. Feb 12, 20 inflation tax or seigniorage making the currency weak by printing a lot of money which devalues the currency and inflates the economy and hence results in financial loss of value for the cash holders is known as inflation tax or seigniorage. Tax efficiency, seigniorage and central bank conservativeness. Governments may finance its expenditures through multiple resources. Seigniorage is the difference between the value of currencymoney and the cost of producing it.
Seigniorage is the difference between the value of money and the cost to produce it in other words, its the economic cost of producing a currency within a given economy or country. Money creation, reserve requirements, and seigniorage. Seigniorage adds to the money supply and can cause inflation, so it is sometimes. Seignioragemoney creation is one potential source of. Seignioragemoney creation is one potential source of revenue. 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. Inflation tax is not related to any kind of direct tax. In addition, if seigniorage decreases, the central bank should be more conservative. In short, at present seigniorage can be said to be the. Hyperinflation in the weimar republic of germany was caused by rampant printing of currency to pay off war debts and ruhr striking workers. Furthermore, considering the high inflation threshold for seigniorage maximization, it would be prudent for ghana to find an alternative source of budget finance that is noninflationary in the longrun. A distinct but related concept to seigniorage and central bank revenue is the inflation tax. For this purpose, we examine the long run relationship between nominal interest rates, inflation and tax revenue using time series dataset for turkish.
Seigniorage remained a limited source of real revenue in pakistan. Indeed, for each percentage point rise in inflation above 7 percent, the u. The precise circumstances under which use of the inflation tax is secondbest optimal remain an unsettled issue. Dynamic seigniorage theory 605 themoneydemandspeci. Seigniorage where does it come from and who gets it. The policy dilemma of economic openness and seigniorage. The choice of exchange rate regime is thus related to questions discussed in optimal inflation tax analysis.
Argentina, where increases in inflation appear to be closely linked to government attempts to raise seigniorage, was chosen for this study because of its persistent high rates of inflation and its fiscal imbalance. Seigniorage is usually distinguished into monetary, or gross seigniorage s, and fiscal seigniorage sg, or net seigniorage. Inflation and seigniorage in argentina ingles banco mundial. Apr 08, 2019 governments may finance its expenditures through multiple resources. Seigniorage revenue and inflation in the semantic scholar. Fiscal seigniorage is defined as the revenue after allowances for different sorts of cost from the provision of the currency have been made.
Pdf this research analyzes the changes of seigniorage and inflation tax in mexico during the last decades associated with the excess liquidity that. It can also be termed as a source of revenue for governments as the value of money printed is generally higher than the cost of producing it. We examine the long run relationship between nominal interest rates, inflation and. For this purpose, he first constructed the exante seigniorage revenue maximizing inflation model, and then calculated annual inflation tax and seigniorage revenues for the post1980 period turkish economy. The goal of this study is to test the implication of optimal seigniorage theory that in the long run higher tax rates are associated with higher inflation rates and higher nominal interest rates. Seigniorage it is the right of the government to print money. The inflationseigniorage link is a significant problem in monetary economics as it relates to maximizing government revenues from the printing of money and the possibility of hyperinflation from the excessive pursuit of seigniorage. Economists regard seigniorage as a form of inflation tax, returning resources to the currency issuer. Seigniorage, once relied on too heavily to finance the government deficit, can easily lead to hyperinflation. This paper presents an analysis of the optimal inflation tax in section. Monetary seigniorage is defined as the whole amount of seigniorage generated.
Thus, the growthrate effect translates into a tax base that increases at a slower rate. Only economists could come up with such overcomplicated rubbish. What is the executive giving up by adopting the euro. Dollarisation, inflation tax, openness, seigniorage, ghana. The effect of corruption, seigniorage and borrowing on inflation. A distinct but related concept to seigniorage and central bank revenue is the inflation tax, 3s. Figure 1 also says that during high and volatile inflation periods, due to losses in real money balances, i. The term seigniorage refers to the revenue a government generates by printing money. Interestingly, the high seigniorage maximizing level of inf suggests that the economy of ghana is far below the threshold of declining seigniorage revenue. The purpose of this paper is to examine how seigniorage in the economy of argentina economy between.
With fewer deposits, the seigniorage tax base declines. Inflation and inflation tax in developing countries. One way to do this is to assume that the real quantity of moneywhich for seigniorage revenue is the tax baseis a function of its real rate of return. More specifically, let real money balances be positively related to the real return on money.