Seigniorage: What is it and who gets it?

Seigniorage: What Is It and Who Gets It? By

Martin Klein and Manfred J.M. Neumann

C o n t e n t s : I. Introduction. - II. An Accounting Framework. - III. Concepts of Seigniorage. - IV. The Distribution of Seigniorage: Evidence from W. Germany. - V. Summary and Conclusions.

I. Introduction

T he key point of this paper is best introduced by means of a simple example. During 1987 the Bank of England issued currency in the amount ofs 0.77 billion. During the same year

H. M. Treasury used s 1.05 billion from "notes and coin" in budgetary financing. The two amounts are fairly close; the gap can be ascribed to differences in timing and in the definition of monetary aggregates. Now compare this with Germany. During 1987 the Deutsche Bundes- bank issued DM 11.9 billion in new currency. But the Federal Gov- ernment received a transfer of only DM 0.3 billion from the Bundes- bank early in 1988, reflecting the Bundesbank's unappropriated profit for 1987. This was for all practical purposes the only financial benefit which the government derived from the Bundesbank. Evidently there was a huge gap between the amount of base money issued and the government's revenue from the Bundesbank. This example raises two (disturbing) questions. Firstly, where did the discrepancy between the two amounts "disappear" to in the German case? Second, what ex- plains the difference between the result for the United Kingdom and that for Germany? Questions of this type are at the core of our article.

In the theoretical literature, seigniorage is usually defined as the government's revenue from the creation of money. Empirically, on the other hand, seigniorage is typically proxied by the private sector's cost of holding money. The tacit assumption underlying this quid pro quo is that the government's revenue and the private sector's cost are

Remark: Earlier versions of this paper were presented at the Fourth Annual Congress of the European Economic Association (Augsburg, September 1989) and at the Institut fiir Weltwirtschaft in Kiel. We thank the participants for useful comments. Research was supported by the Deutsche Forschungsgemeinschaft (Sonderforschungsbereich 303).

206 Weltwirtschaftliches Archiv

equal. This assumption is also evident from the recent debate about seigniorage in Europe. A number of authors have pointed out that seigniorage is an important source of government finance in several European countries, in particular in Southern Europe. Dornbusch [1988] claims that this is an appropriate policy for countries with inefficient tax systems or high public debt ratios. Grilli [1989] presents a model which implies a positive relationship between the level of the profit tax rate and the degree of monetary financing. Other authors argue that the drop in the inflation rate that would result in these countries from irrevocably fixed exchange rates vis-~t-vis the rest of the EMS would entail unsustainable seigniorage losses. Thus, they conclude that countries with a high budgetary need for seigniorage should not irrevocably fix their exchange rates with the low-inflation countries of the EMS. 1 From all this it is evident that practically all authors who write about seigniorage in Europe refer to itsfiscal aspect, i.e. to the government's revenue from the creation of money. But when they turn to the evidence they look at the monetary aspect of seigniorage, i.e. at the private sector's cost of holding money. This practice is justified when there is a close link between the fiscal and monetary aspects of seigniorage. However, as our example above indicates, this link is not as close and direct as is generally assumed: the fiscal and monetary aspects of seigniorage do not necessarily coincide.

In most empirical applications the authors measure seigniorage by the change in base money deflated with the consumer price level. The tacit assumption is that this approach is appropriate for all countries and that it can be used indiscriminately for inter-country compari- sons. In this paper we question this assumption. We will show that seigniorage depends crucially on the legal, institutional and operational details that are relevant for the creation of base money in a country. This implies that a consistent comparison of seigniorage between countries has to take into account these conditions. We develop an analytical scheme - an accounting framework - for this purpose.

Our point of departure is the simple observation that seigniorage can be viewed from two sides: it is generated through a wealth transfer from the private sector to the monetary authorities, it is used for public sector finance and for implicit transfer payments to other sec-

1 For other references, see Giavazzi and Giovannini [1989], Gros [1989], and Molho [1989].

Klein/Neumann: Seigniorage 207

tors. The generation of seigniorage reflects the private sector's money demand and the public sector's monopoly on base money creation. Therefore, as a first approximation, the total amount of seigniorage generated can be seen as independent from the way in which base money is created. On the other hand, we will show below that the distribution of seigniorage among different uses depends critically on the institutional and operational details of base money creation. This means specifically that a central bank with a sufficient amount of operational independence will be able to influence the amount of seigniorage accruing to the government without changing money growth rates. A case in point is the Deutsche Bundesbank. Although the German inflation rate is notoriously low by international comparison, seigniorage has become a fairly important issue in German fiscal policy. We use the German example as an illustration of several issues that have been neglected in the debate about European seigniorage which has mainly focused on the "inflation tax" issue. Given that the Bundesbank has repeatedly been mentioned as a potential model for a European Central Bank, our extension of the seigniorage debate to Germany should in itself be of considerable interest.

The remainder of the paper is organized as follows: To set the stage for our analysis, in Section II we develop the accounting framework for the generation and the distribution of seigniorage. In Section III we study the question how the existing concepts of seigniorage can be integrated in this accounting framework. In Section IV we analyze the distribution of seigniorage to the various sectors of an economy. As a first empirical illustration we present evidence from Germany. Fi- nally, Section V summarizes the main results and discusses the issues that emerge for future research.

II. An Accounting Framework

In our analysis of seigniorage we first develop an accounting framework which links the sources of base money creation with the government budget identity. The central bank creates base money (M) by lending to the private sector (D) and to government (A), by purchasing government debt in the open market (B), and by acquiring net international reserves (F) through interventions in foreign exchange markets. Accordingly, the balance-sheet for the flows of the central bank can be written as follows

M=A + [~+ D+eP+ Nu, (1)


where dots over variables denote time derivatives (in the continuous- time case) or period-to-period changes (in the discrete-time case), e is the nominal exchange rate and N M denotes the change in the net balance of all other items, such as suspense accounts, etc.

Next, consider the central bank's profit and loss account. The central bank's profit transfer to the government (R) can be written as the difference between total revenues and total costs:

R = a A + b B + d D + e f F + N R - V - C . (2)

The lower case letters a, b, d and f denote the interest rates on the assets denoted by the corresponding upper case letters. N R summarizes all other net revenues. V represents revaluation losses (or gains, if negative) on international reserves and C denotes the central bank's operating costs.2 Our final step is to introduce a stylized version of the budget identity of the central government:

G - T + b B r + aA = Br +/1 + R . (3)

The left-hand side of this equation is the sum of the primary deficit, G - T, and the interest expenditure on all government bonds, including those held by the central bank. The right-hand side shows that the total deficit is financed by issuing bonds, by borrowing from the central bank, and by using the profit disbursed by the central bank. B r denotes the total stock of government bonds. Consolidating (1) through (3) yields the following budget identity of the public sector: 3

G - T + (b Be - Be) = 2fl + (dD - 13) + e ( f F - F)

- C - V - N , ( 4 )

where B e denotes the private sector's holdings of government bonds and N = NR -- N~ is a net residual of all other items. Equation (4) will serve as the unifying framework for the discussion of seigniorage in the following sections. Its left-hand side reflects the accounts of the government while its right-hand side reflects the accounts of the central bank.

2 We ignore interest payments on the reserves required by commercial banks. See Gros [1989] for a discussion of this issue. 3 The term "public sector" refers to the consolidation of the central government and the central bank.


III. Concepts o f Se igniorage

The two alternative concepts o f seigniorage which have been dis- cussed in the economic l i terature can be labeled monetary seigniorage and opportunity cost. As with most conceptual issues there is no definite and " t r u e " answer to the quest ion as to which concept o f seigniorage is superior. This quest ion will perhaps never be settled and we shall not a t t empt to settle it here. Rather , we will show that bo th concepts o f seigniorage can be integrated with the public sector accounts in the context o f (4) and that bo th are inadequate measures for the government ' s revenue f rom money creation.

First o f all we consider the opportunity cost concept o f seigniorage. Denot ing seigniorage by s and the price level by p, we can write the flow o f seigniorage according to this concept as follows:

s o = i M / p , (5)

where i denotes an appropr ia te ly chosen nominal interest rate, usually the rate on government bonds. 4 The implicit assumpt ion o f this concept o f seigniorage is that the private sector 's revenue loss f rom forgone interest earnings - i.e. the oppor tun i ty cost o f m o n ey - corre- sponds to an equivalent revenue gain for the government f rom issuing money. 5 In o ther words, " f ia t money can be viewed as a zero interest loan to the gove rnmen t " so that "seigniorage is given (by) the interest savings the government obtains by being able to issue zero interest rate securities in the form o f cur rency" [Gros, 1989, p. 2].

We now integrate the oppor tun i ty cost concept o f seigniorage with the public sector accounts. Combin ing the account ing f r amework developed in Section II with (5), we can derive the following equa t ion for the dis tr ibut ion o f seigniorage: 6

So s ~ + c + ( i - d ) D eF A + B = - - + (i - - f - ~/e) + (i -- 9a+n) - - , (6) p p p

4 Another possible choice for i is the effective nominal rate of return on a market portfolio of assets and securities. s As Horst Siebert has reminded us, the private sector's loss from forgone interest earnings is accompanied by an economy-wide productivity gain from the use of money. This is certainly correct. But note that the revenue-maximizing rate of inflation [Auern- heimer, 1974] is not identical to the rate which maximizes the net social productivity of money [Friedman, 1969]. 6 We assume that the valuation adjustment item V is equal to the true revaluation loss on international reserves, which in our model is given by -~E Moreover, we omit the residual items N M and Ng which are relevant only for empirical purposes. Credit to the domestic private sector and international reserves are then the only assets which yield interest revenues for the public sector as a whole.


with

s o = (G - T + b B , - Bp)/p (7)

c = C / p , (8)

where ga + B = (A + B) / (A + B) denotes the growth rate of total central bank credit to government. Equation (6) provides a sources-and- uses format for seigniorage. On the left-hand side the private sector's forgone interest revenues are the source of seigniorage. The right- hand side shows the distribution of this amount between the government, the central bank, the domestic private sector, the rest of the world, and a potential deadweight loss resulting from extending credit to government.

In more detail the uses of seigniorage shown on the fight-hand side are as follows: s o is the government's net monetary finance re- quirement in output units. It measures that part of seigniorage which the central bank passes on to the government. Henceforth, we will refer to it a s f i s c a l seigniorage. This, if anything, is the proper measure of the government's revenue from the creation of money, e denotes the central bank's operating costs in real terms.

Next we allow for the possibility of interest subsidies to the domestic private sector. They are given by the term ( i - d ) D / p which is positive if the central bank's lending rate is below the competitive market rate. This term then represents the arbitrage profit the private sector can make by borrowing from the central bank at the rate d and investing the funds at the competitive rate i. Hence we have:

s o = (i -- d) D i p >_ O. (9)

Like the domestic private sector, the central bank's external debtors may also be recipients of implicit subsidies. These external subsidies are defined by the term (i - f - ~ / e ) eF /p . With perfect foresight, covered interest parity implies that i - ~/e = i* holds, where i* is the competitive foreign interest rate. 7 The share of seigniorage received by the central bank's external debtors is thus

sr = (i* - f ) e F / p . (10)

The last term on the right-hand side of (6), (i - Oa + n)(.4 + B)/p , represents the net loss of seigniorage which results from creating

7 Without perfect foresight a term containing the expectational error with respect to the exchange rate and (possibly) a risk premium have to be added.


money through credit to government. This term consists of two components. There is a dead-weight loss of seigniorage because the interest revenue forgone for the private sector is not matched by a corresponding gain in interest revenue for the public sector. But this loss is partly compensated by the growth in the outstanding stock of credit to government, s Combining (6), (9) and (10), we can now rewrite the distribution of opportunity cost seigniorage as follows:

A + B s o = s~ + c + s o + s~ + ( i - - g a + B ) - - (11)

P

Equations (6) through (11) also highlight the reasons why the government's revenue from money creation could fall short of the total seigniorage extracted from the private sector. The first is that the central bank charges below-market interest rates on its lending. The second reason is that the central bank creates base money by issuing credit to the government which yields no interest revenue from outside the public sector.

Although the opportunity cost concept of seigniorage is based on a sound theoretical rationale 9 its empirical applicability is hampered by the fact that it requires the choice of the "true" interest rate i. As all such choices are somewhat arbitrary, this introduces a certain ambiguity into all empirical approaches based on this seigniorage concept. This is the reason why most empricial research uses the concept of mone tary seigniorage, which is generally written as follows:

sM = M / p . (12)

Monetary seigniorage measures the actual wealth transfer which the private sector has to make in order to receive base money in the amount of M from the central bank. This concept of seigniorage has been used widely and for many different purposes. Apart from the studies mentioned in the introduction, Friedman [1971], Calvo [1978] and other authors apply it in theoretical models to determine the revenue-maximizing inflation tax. Fischer [1982] uses it in an empirical study to evaluate the incentives for a country to abandon its own

s Full compensation of interest losses through growth of credit to government is impossible in the long run unless the economy is in a state of golden-rule growth where the rate of growth of the money supply equals the nominal interest rate. 9 See Auernheimer [1974] who has shown that outside the golden-rule path monetary seigniorage underestimates the total cost imposed on the private sector and thus over- states the revenue-maximimizing rate of inflation.


currency. However, it is clear that the total wealth transfer may be larger than is indicated by the monetary concept. For example, think of a situation where the outstanding stock of base money has been financed entirely through purchases of private sector securities. Even if the private sector does not desire an increase in its base money holdings (i.e. a ; /= 0) it still has to make a wealth transfer in the form of interest payments on its outstanding debt vis-gt-vis the central bank.

In order to study this question further we first integrate the monetary concept of seigniorage into the accounting framework developed in the previous section. Combining (7), (8) and (12) with the public sector budget identity (4) yields

SM = SG + C + V + [(/) -- d D ) + e ( F - - f F ) ] / p , (13)

where we use v = V/p to denote the revaluation losses in real terms. This equation presents monetary seigniorage in a sources-and-uses format. The left-hand side measures the total seigniorage that arises through the wealth transfer of private money holders; the right-hand side shows the distribution of this amount between the government, the central bank, revaluation losses and net investment in interest bearing assets.

Can monetary seigniorage be used as a proxy for the government's revenue from money creation? This amounts to asking whether (13) implies that s o = s ~ - c holds. A simple example shows that this is not

generally the case. We make the following assumptions: (i)the real rate of growth (g), the real interest rate (r) and the rate of inflation (~) are constant and equal worldwide; (ii)the exchange rate is constant and thus the valuation adjustment item is zero; (iii)the velocity of circulation of base money is constant; (iv) the central bank receives competitive interest rates on all its assets; (v) the composition of the central bank balance sheet is constant. With these assumptions we have

f k /D = F / F = 9 + rr, d = f = r + 7r, v = O. (14)

Using (14) in (13) and rearranging yields

D + e F s o = s M - c + ( r - O ) - -

P

On closer inspection, this equation shows that, in general, monetary seigniorage does not provide a correct measure of the government's revenue from the creation of money. If the real rate of interest exceeds the rate of growth and if credit to the private sector as well as


net foreign assets are non-negligible sources of base money growth, the sum of fiscal seigniorage and the central bank's operating costs will exceed monetary seigniorage. However, there are two sufficient conditions which render monetary seigniorage a correct measure of the revenue created. These are (i) that credit to the government is the only source of base money creation, D = F = 0, or (ii) that the real interest rate coincides with the real rate of growth, i.e. in a state of golden-rule growth [Gros, 1989, p. 2].

The question regarding the conditions under which monetary seigniorage can be used as a proxy for fiscal seigniorage is further illustrated if we incorporate implicit interest subsidies among the uses of monetary seigniorage on the fight-hand side: 1o

sM s ~ + c + s o + s r + ( g o - i ) D - i ) e F = - + (ge . ( 1 5 ) P P

This sources-and-uses format for monetary seigniorage is equivalent to (11). The subsidies s o and s r are defined in (9) and (10). The last two terms on the fight-hand side represent adjustments for the interest earnings on central bank assets which are neglected in the monetary seigniorage concept.

IV. The Distribution of Seigniorage: Evidence from W. Germany

The upshot of our analysis in the previous section is that both seigniorage concepts currently existing in the literature provide an inadequate measurement of the government's revenue from money creation. This result is in contrast with the practice of most of the empirical literature where monetary seigniorage is generally applied as a proxy for the actual seigniorage flow to the government. The two implicit assumptions of this approach are: (i) the government actually receives (in one way or another) the seigniorage indicated by the change in the monetary base, independently of which legal and institutional regulations govern the relationship between the government and the central bank; (ii) the amount of seigniorage accruing to the government does not depend on the specific ways and means in which base money creation is implemented by the central bank.

In order to illustrate that these assumptions may be at variance with the facts, we check what the monetary concept tells us about

1o We make the same assumptions regarding V as we did in (6) and (10).


Table 1 - Seigniorage in Relation to GNP and Total Revenue for Various Countries (percent)

GNP

1960-73 1973-78

Total revenue

1960 - 73 1973- 78

W. Germany United Kingdom

United States

0.9 0.7 6.3 4.8 0.6 1.0 1.9 2.8 0.4 0.5 2.1 2.7

Canada Japan Austria Belgium Denmark France Italy Netherlands Norway Sweden Switzerland

Average

O.5 O.7 2.7 3.4 1.4 1.2 10.7 12.9 1.1 1.0 5.0 4.7 1.0 0.9 4.3 3.5 0.4 0.3 1.2 0.3 5.1 1.0 2.0 3.9 9.8 16.0 0.6 0.6 0.6 1.0 0.5 0.9 2.1 1.4

1.0 1.0 5.3 5.8

Source." Fischer [1982].

recent seigniorage flows in the U K and in Germany. Consider Table 1 which we have taken from Fischer [1982]. According to this table, the German government managed to receive a higher share of its total revenue from seigniorage than the U K government. This is evidently a strange result, given that the institutional relations between the government and the central bank are vastly different in the two countries. It is well-known that the Bank of England is under the direct control of the Treasury and has to contribute systematically to budget finance. The Bundesbank, in contrast, is a legally independent institution, and government borrowing is constrained by a tight legal ceiling (DM 6 billion, or less than 3 percent of the monetary base). As a result, credit to government plays an insignificant role in German base money creation. Therefore it is unlikely that a given change in the monetary base implies the same flow of fiscal seigniorage for both the U K and Germany.

In order to obtain a first empirical insight into the relation between monetary and fiscal seigniorage we return to (13) which provides a useful basis for analyzing the distribution of monetary seigniorage. In Table 2 we apply this equation to data from Germany. The table


Table 2 - The Distribution of Monetary Seigniorage in W. Germany a

1960-87

1960-73

1974-87

s M = s G + c + o + R E S

7.73 2.96 0.86 2.05 t.87 (38.3) (11.1) (26.5) (24.1)

8.99 1,16 0.62 1.88 5.32 (12.9) (6.9) (20.9) (59.2)

6.48 4.76 1.09 2.22 - 1.59 (73.4) (16.9) (34.2) (-24.5)

a Average annual flows in DM billion at 1980 prices and, in brackets, in percent of monetary seigniorage. For the nomenclature, see (13) in the text. The variable RES summarizes the excess of asset accumulation over interest revenue and (possibly) a statistical residual.

Source: IMF [various issues]; Deutsche Bundesbank [a].

shows that over the sample period 1960-1987 the average annual flow of monetary seigniorage, measured at 1980 prices, was D M 7.7 billion. Out of this total the central government received no more than 38 percent (DM 2.96 billion). A share of 11 percent (DM 0.9 billion) was used to cover the Bundesbank's operating costs, and a share of more than 24 percent was retained by the Bundesbank for asset accumulation. Thus the German data confirm our conjecture that monetary seigniorage is a misleading indicator of the government's revenue from money creation. This appears to hold not just for the short run but also for longer periods, given that our sample period spans 28 years. However, it is worth noting that the distribution of monetary seigniorage in Germany has undergone a substantial change over time. Figure 1 shows the average distribution of monetary seigniorage for the two subperiods 1961-1973 and 1974-1987. During the first subperiod the Bundesbank transferred only 13 percent of monetary seigniorage to the central government and used the major share of seigniorage for the accumulation of interest-earning foreign and domestic private debt. In contrast, during the second subperiod asset accumulation was sharply reduced, whereas massively increased profit transfers pushed up the government's share of seigniorage to 73 percent. But note that the Bundesbank's own absorption of seigniorage for operating costs increased as well, rising from an average level of 7 percent during the first subperiod to 17 percent during the second.

The sharp reduction in the use of seigniorage for further asset accumulation is an interesting phenomenon which in itself requires


Figure 1 - Distribution of Monetary Seigniorage in W. Germany (DM billion, annual averages)

Other 0.63

Other ~ Central Bank 7.2 Central x , ~ N ' ~ X X ' ~ N ~ J log

Bank

Government /NNNNNNNNNNNNNNNNNNNx~NNNNNNNNNNNNW ] - 0

6 o v e r n m e n t ~ 4.76

1 9 6 0 - 1 9 7 3 1974 - 1 9 8 7

explanation. It is tempting to conjecture that the Bundesbank simply decided to reduce the asset accumulation in order to raise the share of fiscal seigniorage. However, this conjecture is not warranted, given that in Germany fiscal seigniorage can only be raised through profits, i.e. by earning higher interest revenues, and not by raising direct lending to the government. The explanation must probably be sought in a change in the order of magnitude of the Bundesbank's interest revenues on foreign and domestic private debt relative to the expan- sion of the monetary base. 11 The temporal pattern of German seigniorage flows suggests a stylized two-phase interpretation: a first phase of asset accumulation was followed by a second phase during which the investments of the first subperiod "matured". This amounts to a postponement of seigniorage from the first to the second period. However, this interpretation raises another question. If it were true, one should expect that, after accounting for the Bundesbank's operating costs, fiscal seigniorage during the second subperiod should have exceeded monetary seigniorage by the amount of real interest earnings on the Bundesbank's assets. But this is not what we observe. In fact, during both subperiods fiscal seigniorage falls short of monetary seigniorage. This suggests that some seigniorage receipts were not merely postponed but permanently lost for the government. As we have shown in Section III, one possible explanation for such losses is

t i It can be shown that the need to purchase additional assets in order to finance a given flow supply of base money becomes smaller, the larger the flow of interest earnings on existing assets is.


that seigniorage is redistributed to other sectors through below-market interest rates on central bank credit. It is common practice in many countries for the central bank to grant interest subsidies on some of its assets. Typically, the discount rate charged on private debt is set below the money market rate because this permits credit ration- ing. Also it is well-known that interest rates on certain components of the official reserves are below the competitive world interest rates. Another explanation for permanent seigniorage losses can be sought in the central bank's use of seigniorage for the acquisition of non-interest-bearing assets. Apart from the unavoidable costs of money pro- duction and maintenance, the central bank may absorb a portion of seigniorage for its own purposes, for example by providing housing and recreational facilities for its employees, by maintaining economic research departments and lavish guest quarters.

Equation (15) provides a general frame for empirical estimates of implicit subsidies in the distribution of seigniorage. Certainly, all such estimates are influenced by the choice of the "true" competitive interest rate i and therefore cannot be considered precise measurements. But to get an idea whether the order of magnitude of the subsidies is sizeable enough to make a detailed investigation worthwhile we present in Table 3 rough estimates of the interest subsidies on the Bundes- bank's lending to the domestic private sector through the discount window. The most obvious proxy for these subsidies is obtained by comparing the Bundesbank's rediscount rate to the commercial bill

Table 3 - Implicit Subsidies on Discount Lending in W. Germany a

1960-73 1974-87 1960-87

Commercial bill rate b

Public bond yield c

Three-month interbank rate d

558.6 (8.6)

282.1 784.7 533.4 (3.1) (12.1) (6.9)

196.0 468.9 332.5 (2.2) (7.2) (4.3)

a Annual averages in DM million at 1980 prices and, in brackets, in percent of monetary seigniorage. - b Wechseldiskontkredite (Bundesbankffihige Abschnitte, unter DM 100000) [Deutsche Bundesbank, [b], Table V.7] . - c Umlaufsrenditen; Anleihen der 6ffentlichen Hand [Deutsche Bundesbank, [b], Table VL6]. - d Drei- monatsgeld [Deutsche Bundesbank, [b], Table V.6].

Source: IMF [various issues}; Deutsche Bundesbank [a; b].

218 Weltwirtschaftl iches Archiv

discount rate. Unfortunately a complete series for the latter is only available for the second half of the sample, where the implied subsidies amount to an average 8.6 percent of monetary seigniorage. In order to obtain a picture for the whole sample we use the public bond yield and the 3-month interbank rate as alternative proxies for the "true" interest rate. The general impression that emerges is that subsidies were fairly low during the first part of the sample but rose more than threefold during the second part. For the whole sample we estimate subsidies between 4.3 percent (for the interbank rate) and 6.9 percent (for the bond yield). Although we cannot rule out that our estimates are biased it is clear that the redistribution of seigniorage to the private sector is not a quantit~ n~gligeable. From a macroeconomic point of view such repayments of seigniorage are warranted because they reduce the amount of fiscal seigniorage and hence the hidden taxation of money holdings by government. But note that the repay- ment is not directly linked to the generation of seigniorage and may therefore imply a redistribution of wealth within the private sector. Moreover, even if such redistributional aspects are absent it is a Pareto-inefficient policy to collect seigniorage from the private sector through inflation tax and then to redistribute it to the same sector through interest subsidies. The Pareto-superior policy is not to collect inflation tax at all.

V. Summary and Conclusions

In this paper we have reexamined the relationship between the government's revenue from the creation of money and the private sector's cost of holding money. In practically all empirical work - particularly in the recent debate about seigniorage in Europe - these two aspects of seigniorage have been assumed to coincide. We have shown both theoretically and empirically that this assumption is not warranted and that the government's receipts of seigniorage depend crucially on the legal, institutional and operational details of base money creation. A consistent comparison of seigniorage between countries therefore has to take into account these details. Moreover, a central bank with a sufficient extent of operational independence will be able to influence the amount of seigniorage accruing to the government even at unchanged rates of money growth. This has been illustrated by some empirical evidence from the Deutsche Bundes- bank, where we have distinguished between the postponement of seigniorage and the permanent losses of seigniorage for the govern-


ment. The empirical evidence suggests that both aspects are sizeable enough to warrant further study.

Our analysis has implications for the current problems of the EMS as well as for the envisioned creation of a European central bank. Our results imply a considerable weakening of the link between inflation and seigniorage which was always presupposed in the debate about seigniorage in Europe. In fact, raising a country's rate of inflation is neither a necessary nor a sufficient condition for increasing the government's receipts of seigniorage. The solution for the monetary finance problems in Southern Europe should perhaps better be sought in increasing central bank efficiency than in raising the rate of inflation. Our analysis has shown that a government with direct access to credit from the central bank may ultimately receive less revenue from money creation than a government without such access. The reason for this is that credit to government is an inefficient way to disburse seigniorage to the government. At the same rate of inflation more revenue can be raised by creating money through purchases of interest-bearing private sector assets. Moreover, the German experience shows that there may be substantial shortfalls of government revenue from money creation which are linked to the central bank's operating procedures and to its choice of monetary instruments. The Deutsche Bundesbank is also a case in point that the government's revenue from money creation can be increased dramatically at low and steady rates o f inflation. Even though the Bundesbank's efficiency falls short of per- fection, we have presented evidence that it has improved substantially since the Bundesbank developed more market-oriented instruments and increased its operational independence vis-~i-vis the rest of the world. Thus, we conclude that the issue of central bank efficiency emerges as an issue for empirical research in European monetary economics. This concerns not only the current state of the EMS but also the construction of a European central bank - whose operational procedures should be so designed as to yield maximum efficiency.

References

Auernheimer, Leonardo, "The Honest Government's Guide to the Revenue From the Creation of Money". Journal of Political Economy, Vol. 82, 1974, pp. 598-606.

Barro, Robert, "Measuring the Fed's Revenue from Money Creation". Economic Let- ters, Vol. 10, 1982, pp. 327-332.

Cairo, Guillenno, "Optimal Seigniorage from Money Creation". Journal of Monetary Economics, Vol. 4, 1978, pp. 503-517.

220 Weltwir t schaf t l iches Archiv

Deutsche Bundesbank [a], Geschiiftsberichte. Frankfurt, various issues.

- [b], Monatsberichte. Frankfurt, various issues.

Dornbusch, Rudiger, "The European Monetary System, the Dollar and the Yen". In: Francesco Giavazzi, Stefano Miller, Marcus Miller (Eds.), The European Monetary System. Cambridge 1988, pp. 23-47.

Fischer, Stanley, "Seigniorage and the Case for a National Money". Journal of Political Economy, Vol. 90, 1982, pp. 295-323.

Friedman, Milton, "The Optimum Quantity of Money". In: Milton Friedman, The Optimum Quantity of Money and Other Essays. Chicago 1969, pp. 1-50.

- , "Government Revenue from Inflation". Journal of Political Economy, Vol. 79, 1971, pp. 846-856.

Giavazzi, Franeesco, Alberto Giovaunini, Limiting Exchange Rate Flexibility: The Euro- pean Monetary System. Cambridge 1989.

Grilli, Vittorio, "Seigniorage in Europe". In: Marcello de Cecco, Alberto Giovannini (Eds.), A European Central Bank? Perspectives on Monetary Unification after Ten Years of the EMS. Cambridge 1989, pp. 53 -79.

Gros, Daniel, Seigniorage in the EC: The Implications of the EMS and Financial Market Integration. IMF Working Paper No. 7. Washington 1989.

International Monetary Fund (IMF), International Financial Statistics. Washington, various issues.

Molho, Lazaros, European Financial Integration and Revenue from Seigniorage: The Case of Italy. IMF Working Paper No. 41. Washington 1989.

Z u s a m m e n f a s s u n g : Seigniorage: Was ist das und wer bekommt es? - Aus fiskalischer Sicht handelt es sich bei ,,Seigniorage" um die Einkiinfte der Regierung aus der Schaffung von Geld, aus der Sicht der Geldtheorie um die Kosten des privaten Sektors fiir die Geldhaltung. Nachdem in diesem Artikel die Konten der Regierung und der Zentralbank in ein allgemeines Buchungssystem integriert worden sind, ergibt sich, dab die Regierungseinnahmen aus ,,Seigniorage" entscheidend von den institutionellen und operationalen Einzelheiten bei der Schaffung der monet/iren Basis abhfingen. Eine Zentralbank mit ausreichender operationaler Unabhfingigkeit wird in der Lage sein, den Umfang der ,,Seigniorage", der der Regierung bei gegebenen Wachstumsraten der Geldmenge zuflieBt, zu beeinflussen. Das in dem Artikel vorgestellte Buchungssystem wird auf deutsche Verh/iltnisse angewandt. Die Analyse enthfilt Implikationen sowohl fiir die gegenw/irtige Praxis des EWS als auch fiir die geplante Schaffung einer Europ~i- ischen Zentralbank.

R 6s u m 6: Le seigneuriage: Qu'est-ce que c'est et qui est-ce qui le re~oit? - De point de vue fiscal, le seigneuriage est le revenu du gouvernement rrsultant de la frappe de la monnaie, de point de vue de la throrie monrtaire il s'agit des cofits du secteur priv6 qui rrsultent de la prrfrrence pour la liquiditr. Aprrs avoir intrgr6 le compte du gouvernement et celui de la banque centrale dans un cadre g~nrral de comptabilitr, on


a g6n6ralement constat6 que le volume du seigneudage d6pend des d6tails institution- nels et op6rationnels de la cr6ation de la base mon6taire. Une banque centrale d'une ind6pendance suffisante sera en mesure d'influencer le montant du seigneuriage destin6 au gouvernement, si les taux de croissance de la masse mon6taire sont donn6s. Le cadre de comptabilit6 est appliqu6 aux donn6es de la RFA. L'analyse a des cons6quenees pour les op6rations actuelles du Syst6me Mon6taire Europ6en ainsi que la cr6ation d'une Banque Centrale Eurol~enne.

R e s u m e n : Seignorage: ~qu6 es y qui6n se beneficia de 61? - Desde el punto de vista fiscal, seignorage es el ingreso del gobiemo por la creaciOn de dinero; desde el punto de vista de la teoria monetaria es el costo incurrido por el sector privado al mantener dinero. Despu6s de haber integrado las cuentas del gobierno y del banco central a las cuentas nacionales, se obtiene el resultado general que el ingreso del gobierno por seignorage depende en forma critica de los detalles institucionales y operacionales de la creaci6n de la base monetaria. Un banco central con un grado de independencia operacional suficiente estar~ en condiciones de influenciar el volflmen de seignorage imputable al gobierno, dada la tasa de crecimiento del dinero. El enfoque contable es aplicado a datos para Alemania. E1 anMisis tiene implicaciones para la prfictica actual del Sistema Monetario Europeo y tambi6n para el futuro banco central europeo.

Seigniorage: What is it and who gets it?

Documents

Transcript of Seigniorage: What is it and who gets it?