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Seignior Age

Seignior Age

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Published by: dbevit on Aug 05, 2011
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CEP Discussion Paper No 786April 2007
Willem 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 generallyassigned to an agency of the state, the Central Bank, which may have varying degrees of operationaland target independence from the government of the day.In this paper I analyse four different but related concepts, each of which highlights someaspect of the way in which the state acquires command over real resources through its ability to issuefiat money. They are (1) seigniorage (the change in the monetary base), (2) Central Bank revenue (theinterest bill saved by the authorities on the outstanding stock of base money liabilities), (3) theinflation tax (the reduction in the real value of the stock of base money due to inflation and (4) theoperating 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 intertemporalapproach is required, which focuses on the present discounted value of the current and future resourcetransfers between the private sector and the state. Furthermore, when the Central Bank isoperationally independent, it is essential to decompose the familiar consolidated ‘government budgetconstraint’ and consolidated ‘government intertemporal budget constraint’ into the separate accountsand budget constraints of the Central Bank and the Treasury. Only by doing this can we appreciate thefinancial constraints on the Central Bank’s ability to pursue and achieve an inflation target, and theimportance of cooperation and coordination between the Treasury and the Central Bank when facedwith financial sector crises involving the need for long-term recapitalisation or when confronted withthe need to mimic Milton Friedman’s helicopter drop of money in an economy faced with a liquiditytrap.Key Words: inflation tax; central bank budget constraint; coordination of monetary and fiscal policyJEL Classifications: E4, E5, E6, H6This paper was produced as part of the Centre’s Macro Programme. The Centre for EconomicPerformance is financed by the Economic and Social Research Council.
I would like to thank Charles Goodhart, Michael Bordo, Marc Flandreau and Anne Sibert for helpfulcomments.Willem Buiter is a Research Associate with the Macro Programme, Centre for EconomicPerformance, London School of Economics. He is also
Chair of European Political Economy,European Institute, LSE.
Published byCentre for Economic PerformanceLondon School of Economics and Political ScienceHoughton StreetLondon WC2A 2AEAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor  be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to theeditor at the above address.
W. Buiter, submitted 2007ISBN 978 0 85328 161 0
I. Introduction
Seigniorage refers historically, in a world with commodity money, to the difference between the face value of a coin and its costs of production and mintage.
In fiat moneyeconomies, the difference between the face value of a currency note and its marginal printing costare almost equal to the face value of the note – marginal printing costs are effectively zero.Printing fiat money is therefore a highly profitable activity – one that has been jealously regulatedand often monopolized by the state.Although the profitability of printing money is widely recognized, the literature on thesubject contains a number of different measures of the revenue appropriated by the state throughthe use of the printing presses. In this paper, I discuss four of them and consider the relationship between them in an intertemporal setting. There also is the empirical institutional regularity, thatthe state tends to assign the issuance of fiat money to a specialized agency, the Central Bank,which has some degree of independence from the other organs of the state and from thegovernment administration of the day. This institutional arrangement has implications for theconduct of monetary policy that cannot be analysed in the textbook macroeconomic models,which consolidate the Central Bank with the rest of the government.In the next four Sections, the paper addresses the following four questions. (1) Whatresources does the state appropriate through the issuance of base money (currency andcommercial bank balances with the Central Bank)? (2) What inflation rate would result if themonetary authority were to try to maximise these resources? (3) Who ultimate appropriates and benefits from these resources, the Central Bank or the Treasury/Ministry of Finance? (4) Does theCentral Bank have adequate financial resources to pursue its monetary policy mandate (taken to be price stability) and its financial stability mandate. Specifically, for inflation-targeting Central

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