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. Inflation and seigniorage in argentina ingles banco mundial. The government profits at the expense of the consuming public scott, 1997. The main purpose of an inflation tax is financing government expenditures.
More specifically, let real money balances be positively related to the real return on money. Governments may finance its expenditures through multiple resources. The effect of corruption, seigniorage and borrowing on inflation. The purpose of this paper is to examine how seigniorage in the economy of argentina economy between. The precise circumstances under which use of the inflation tax is secondbest optimal remain an unsettled issue. Dollarisation, inflation tax, openness, seigniorage, ghana. The inflationprone countries would gain from greater financial discipline because the. A distinct but related concept to seigniorage and central bank revenue is the inflation tax, 3s. 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. Seigniorage definition of seigniorage by the free dictionary. Seigniorage remained a limited source of real revenue in pakistan.
Essentially, inflation is a form of indirect income tax, since it causes a decline in the purchasing power of the publics income. Tax efficiency, seigniorage and central bank conservativeness. A quadratic estimation technique following samimi estimation. Seigniorage, once relied on too heavily to finance the government deficit, can easily lead to hyperinflation. Seignioragemoney creation is one potential source of revenue. In addition, if seigniorage decreases, the central bank should be more conservative. 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. Pdf seigniorage and inflation tax in mexico 19852011.
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. 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. 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 short, at present seigniorage can be said to be the. Inflation and inflation tax in developing countries. Apr 08, 2019 governments may finance its expenditures through multiple resources. The revenuemaximizing steadystate in ation rate an important theoretical concept is the revenuemaximizing steadystate in. The effect of corruption, seigniorage and borrowing on. Only economists could come up with such overcomplicated rubbish. 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. Romania, hungary, the czech republic, austria and germany. 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. If inflation and inflation tax seigniorage are integrated in a graphical form, the figure exhibits the characteristics of a lafer curve.
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. May 19, 2014 a distinct but related concept to seigniorage and central bank revenue is the inflation tax, 3s. What is the executive giving up by adopting the euro. The figure below shows a decline in the inflation tax seigniorage as the inflation increases in pakistan.
Evidence the theory of optimal seigniorage can be interpreted as prescriptive. Seigniorage revenue and inflation tax in turkish economy. Monetary seigniorage is defined as the whole amount of seigniorage generated. The revenuemaximizing steadystate in ation rate an important theoretical concept. Thus, the growthrate effect translates into a tax base that increases at a slower rate. Inflation and seigniorage in argentina english abstract. Observe that seigniorage need not equal in ation tax revenue, which is. 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. Seigniorage as an unlimited source of government revenue. Furthermore, the measures they employ to calculate inflation tax and seigniorage are questioned.
Pdf this research analyzes the changes of seigniorage and inflation tax in mexico during the last decades associated with the excess liquidity that. Seigniorage adds to the money supply and can cause inflation, so it is sometimes. A distinct but related concept to seigniorage and central bank revenue is the inflation tax, s3. A distinct but related concept to seigniorage and central bank revenue is the inflation tax. Other income sources currently make up the lions share of the ecbs profits, such as the income earned on the asset purchase programme. Korap 2006 have investigated the courses of inflation tax and seigniorage revenue for policy makers of the turkish economy. 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. 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. Therefore, for these countries their degree of seigniorage is very low. 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. The third concept of measuring seigniorage applies. The term seigniorage refers to the revenue a government generates by printing money. Economists regard seigniorage as a form of inflation tax, returning resources to the currency issuer. Seigniorage has also got nothing to do with inflation deflation, tax, interest or anyting else construed in the article. Seignioragemoney creation is one potential source of. Gros 2004 shows that for the euro area as a whole, seigniorage represents less than one quarter of 1% of gdp. Fiscal seigniorage is defined as the revenue after allowances for different sorts of cost from the provision of the currency have been made. 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.
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. Inflation and seigniorage in argentina ingles resumo. Financing budget deficit by central bank seigniorage in. With fewer deposits, the seigniorage tax base declines. Inflation and seigniorage in argentina english the world bank. Issuing new currency, rather than collecting taxes paid with existing money, is considered a tax on holders of existing currency. Figure 1 also says that during high and volatile inflation periods, due to losses in real money balances, i.
Oct 28, 2018 2 empirical findings on political, monetary and fiscal instability. However, this benefit comes with a cost of higher output and spending deviations. Seigniorage is usually distinguished into monetary, or gross seigniorage s, and fiscal seigniorage sg, or net seigniorage. This paper presents an analysis of the optimal inflation tax in section. We examine the long run relationship between nominal interest rates, inflation and. The inflationseigniorage link should be in the form of a laffer curve and my results confirm this hypothesis. Seigniorage income has been falling since 2008, in line with a decline in euro area interest rates. The inflation tax is the reduction in the real value of the stock of base money caused by inflation. 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. Dynamic seigniorage theory 605 themoneydemandspeci.
Zimbabwe has recently experienced record hyperinflation of 80 billion percent a month. 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. 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. Inflation and seigniorage in argentina english the. Inflation of the money supply causes a general rise in prices, due to the currencys reduced purchasing power. Comparative information on oecd, 2015 and other advanced and emerging economies. Inflation tax is not related to any kind of direct tax. In economies with little seigniorage, this cost will be negligible. 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. 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 has also got nothing to do with inflationdeflation, tax, interest or anyting else construed in the article.
Seigniorage revenue and inflation in the semantic scholar. Seigniorage is essentially a tax on every dollar accepted anywhere as an interestfree loan to the treasury. Reichs dichotomy between seigniorage via mint tax versus seigniorage via reduction of metallic content of coins is therefore, even in theory, less clearcut than he supposes. This paper is concerned with measuring the seigniorage in romania since the fall of communism and the potential gains after passing to euro. Money creation, reserve requirements, and seigniorage. 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. The choice of exchange rate regime is thus related to questions discussed in optimal inflation tax analysis. We examine the long run relationship between nominal interest.
Seigniorage where does it come from and who gets it. See the oecd, 2015 publication entitled tax administration 2015. Indeed, for each percentage point rise in inflation above 7 percent, the u. A singleperiod analysis therefore provides a misleading guide for a profitmaximizing currency monopolist. This paper uses new data from zimbabwe to investigate money demand under hyperinflation using an autoregressive distributedlag model for the period 19802008. Interestingly, the high seigniorage maximizing level of inf suggests that the economy of ghana is far below the threshold of declining seigniorage revenue. 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.
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