Inflation tax, seigniorage laffer curve, budget constrai. Observe that seigniorage need not equal inflation tax revenue, which is. The purpose of this paper is to investigate the impact that movements in both the inflation rate and reserve requirements have on the presentvalue of seignorage revenue. The main purpose of an inflation tax is financing government expenditures. A distinct but related concept to seigniorage and central bank revenue is the inflation tax. The figure below shows a decline in the inflation tax seigniorage as the inflation increases in pakistan. The effect of corruption, seigniorage and borrowing on inflation. Issuing new currency, rather than collecting taxes paid with existing money, is considered a tax on holders of existing currency. Seigniorage revenue and inflation tax in turkish economy. 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. Seigniorage is the revenue that state enjoys by having the monopoly to issue monetary base.
Reich properly points out the deficiency in keyness 1923 treatment of the inflation tax as a revenue source for. The term seigniorage refers to the revenue a government generates by printing money. Tax efficiency, seigniorage and central bank conservativeness. The inflation tax is the reduction in the real value of the stock of base money caused by inflation. In addition, it is found that if the level of seigniorage revenue from inflation decreases, the central bank should be more conservative. Seigniorage definition of seigniorage by the free dictionary. Indeed, for each percentage point rise in inflation above 7 percent, the u. An optimal inflation tax analysis stanley fischer in choosing fixed over flexible exchange rates, a country gives up the right to determine its own rate of inflation and thus the amount of revenue collected by the inflation tax. The inflation tax as a share of gdp will be denoted. However, there is a useful analogy between seigniorage revenue. Seigniorage as an unlimited source of government revenue. Inflation tax is the loss that is sustained by the holder of real money. Seignioragemaximizing inflation world bank documents.
Middle english seigneurage, from old french, from seignor, seignior. May 19, 2014 a distinct but related concept to seigniorage and central bank revenue is the inflation tax, 3s. 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 is government revenue resultant from the emission and maintenance of the stock of currency in circulation. The upshot is a substitution into leisure and a contraction of the seigniorage tax base. Other income sources currently make up the lions share of the ecbs profits, such as the income earned on the asset purchase programme. Seigniorage can be a convenient source of revenue for a government. The importance of convertibility in a theory of seigniorage is a point that it would have behooved reich to explore in greater depth than he has done in this volume. Inflation and seigniorage in argentina english the world bank. Based on the above, it is therefore concluded that if the variability of shocks is not important, then countries with lower levels of tax efficiency and seigniorage should not design central banks that are. Financing budget deficit by central bank seigniorage in. A nations central government, along with its central bank, has monopoly control. Figure 1 also says that during high and volatile inflation periods, due to losses in real money balances, i.
The gist of the economic argument is that people try to avoid taxes, so with higher tax rates, whether it be inflation or income, they have an incentive to reduce the. Seigniorage remained a limited source of real revenue in pakistan. By providing the government with increased purchasing power at the expense of public purchasing power, it imposes what is metaphorically known as an inflation tax on the public. He puts forward a methodology to assess the fiscal. The revenuemaximizing steadystate in ation rate an important theoretical concept is the revenuemaximizing steadystate in. A distinct but related concept to seigniorage and central bank revenue is the inflation tax, 3s. Seigniorage, once relied on too heavily to finance the government deficit, can easily lead to hyperinflation. The revenue a government earns by printing money is called seigniorage, and the inflation that is may occur due to the increased money supply is called inflation tax. Monetary seigniorage is sovereign revenue obtained through routine debt monetization, including expansion of the money supply during gdp growth and meeting yearly inflation targets. Gros 2004 shows that for the euro area as a whole, seigniorage represents less than one quarter of 1% of gdp. Comparative information on oecd, 2015 and other advanced and emerging economies. For example, the federal reserve bank of dallas says it costs only pennies to. In short, at present seigniorage can be said to be the.
Data inflation, on per capita growth, gdp, exchange rate, total reserve of money minus gold, cash surplusdeficit and openness are from the world development indicators world bank, online. Large fluctuations of seigniorage and inflation with the widest fluctuations in latin america suggest that there is no optimal inflation smoothing. Seigniorage is profit from money creation, a way for governments to. Inflation and seigniorage in argentina english the. Key findings the total amount of seigniorage revenue in financial year 20162017 was. With fewer deposits, the seigniorage tax base declines. 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. The present paper, based on cagans 1956 seminal work monetary dynamics of hyperinflation, analyses the effect of inflation on seigniorage revenue in. If inflation and inflation tax seigniorage are integrated in a graphical form, the figure exhibits the characteristics of a lafer curve.
Dollarisation, inflation tax, openness, seigniorage, ghana. Seigniorage revenue and monetary policy federal reserve. Inflation tax inflation tax is the amount the amount of money transferred from net creditors to net debtors due to inflation. Thus, the growthrate effect translates into a tax base that increases at a slower rate. Instead, they argue on the basis of per country unit root tests and simple ols regressions that seigniorage is a residual source of revenueseigniorage goes up when spending increases andor. It depends on the situation which concept we have to use. In the next sections, in addition to the effects of political instability on seigniorage, we also estimate the effects of institutions such as economic freedom and democracy. A distinct but related concept to seigniorage and central bank revenue is the inflation tax, s3.
The third concept of measuring seigniorage applies. Seignioragemoney creation is one potential source of. Korap 2006 have investigated the courses of inflation tax and seigniorage revenue for policy makers of the turkish economy. Neoclassical and structuralists emphasize importance of seigniorage as explanation for inflation in l. Seigniorage is usually distinguished into monetary, or gross seigniorage s, and fiscal seigniorage sg, or net seigniorage. 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. 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. We examine the long run relationship between nominal interest rates, inflation and. 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. Increases at decreasing rate as governments generate revenue by printing money people reduce holdings of money balances as inflation rises, therefore, seigniorage tax base reduced. In our paper, we try to investigate the courses of inflation tax and seigniorage revenue for policy makers of the turkish economy. This study therefore investigated the seig inflation and confirmed the existence of seigniorage laffer curve in ghana.
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. These simple answers become less clear, however, ifthese policy actions result in faster growth. Figure 1 also says that during high and volatile inflation periods, due to. It is seen in figure 1 that inflation tax and seigniorage revenue fluctuate in the range of 1. Fiscal seigniorage is defined as the revenue after allowances for different sorts of cost from the provision of the currency have been made. Money creation, reserve requirements, and seigniorage. Seigniorage income has been falling since 2008, in line with a decline in euro area interest rates.
Inflation works as a tax on nominal assets and interestbearing debt with a rate of interest below the rate of inflation. Seigniorage revenue and inflation in the semantic scholar. The monetary policy effects on seignorage revenue in a. Any serious stabilization effort requires finding an alternative source of revenue to replace the inflation tax. Inflation and seigniorage in argentina english abstract. Note that in equation 2 the government has access to an income tax. The effect of corruption, seigniorage and borrowing on.
Seigniorage adds to the money supply and can cause inflation, so it is sometimes calculated as inflation tax. We examine the long run relationship between nominal interest rates, inflation and tax revenue. The policy dilemma of economic openness and seigniorage. 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. Representing tax revenue this way is not necessary. Revenue or a profit taken from the minting of coins, usually the difference between the value of the bullion used and the face value of the coin. Federal reserve uses its net income from after being laundered from seignorage revenues into net interest on securities and capital gains on securities sales to make dividend payments to the. For this purpose, we examine the long run relationship between nominal interest rates, inflation and tax revenue using time series dataset for turkish. Seigniorage is defined as the governments revenue from the creation of money, which is. 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. Along the whole 1990s and 2000, except during and pre1994 crisis, both inflation tax and the seigniorage revenue are sticky around 1 1.
Seigniorage where does it come from and who gets it. For this purpose, we examine the long run relationship between nominal interest rates, inflation and tax revenue using time series dataset for turkish economy for the period 19802011. In periods of high inflation, when the rate of inflation dominates real growth, most seigniorage is generated as inflation tax. According to a common opinion seigniorage revenue and the inflation tax play an important role in financing large fiscal deficits in all transition countries. If fe and ha are quadratic, then the tax rate and the inflation rate are themselves martingales. Inflation and inflation tax in developing countries. The government profits at the expense of the consuming public scott, 1997. See the oecd, 2015 publication entitled tax administration 2015. 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. 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. Seigniorage adds to the money supply and can cause inflation, so it is sometimes. The productivity of the inflation tax can be analysed by comparing the revenue actually raised from inflation tax with the revenue that could be raised if the quantity of money had risen at a constant rate.
However, there is a useful analogy between seigniorage revenue and income tax revenue. Observe that seigniorage need not equal in ation tax revenue, which is. For this purpose, we first construct an exante seigniorage revenue maximizing inflation model, and then calculate annual inflation tax and seigniorage revenues for the post1980 period turkish economy. Seigniorage revenue and inflation tax munich personal repec. A quadratic estimation technique following samimi estimation. Seignioragemoney creation is one potential source of revenue. Seigniorage revenue and money growth an increase in the money growth rate has an effect on seigniorage that is analogous to the effect that an increase in the tax rate has on income tax revenue. Besides structural variables accounting for the taxing. Interestingly, the high seigniorage maximizing level of inf suggests that the economy of ghana is far below the threshold of declining seigniorage revenue. Dynamic seigniorage theory 605 themoneydemandspeci. 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. Economists regard seigniorage as a form of inflation tax, returning resources to the currency issuer. The paper measures the effects of the integration of european financial markets and lower inflation in the ems on the revenue from seigniorage for the ec member countries with particular focus on. Bank seigniorage revenue depends on the interaction between inflation, the market for demand deposits, and the rate of reserve requirements imposed by the central bank.
478 859 752 1445 1324 740 181 778 705 1541 1120 1098 186 1027 476 102 1006 191 779 580 1318 1458 1493 1475 1366 686 659 922 896 322 33