SEIGNIORAGE….

SEIGNIORAGE....

It is an Introductory macroeconomic concept, Related to Money And Inflation.

Every Government Spends Money as Their Expenditure, Some of these Spending is to buy goods and Services, And some of this is to provide transfer Payments such as pension to the citizen of Country.

As Every Expenditure needs Revenue to finance it, A Government can Finance its Spending in three ways. First, It can raise revenue through Taxes, Such as Personal and Commercial Income Taxes. Second, It can Borrow from the public by Selling Government Bonds. Third It can print Money. The Revenue by printing money is called seigniorage.

Now, How seigniorage works and It’s Implications…

When Government prints money to finance Expenditure, It Increases the Money Supply. The Increase in Money Supply, Thus increases the Inflation. Printing money to raise revenue is like imposing a Inflation Tax.

Initially inflation may not be reviewed as a Tax. As prices Rise, The Real Value of Money falls. Thus, inflation is like a tax on holding Money.

The Another Implication is Hyperinflation.

Hyperinflation is often defined as inflation that exceeds 50% per month, i.e; Inflation more than 1% daily. In hyperinflation prices Explodes. Hyperinflation causes the Sheer inconvenience of living with hyperinflation, when prices changes rapidly by large amounts, it ishard for customers to shop around for the best Prices.

Seigniorage as tax….

Issuing New Currency , rather than collecting taxes paid out of existing money sock, is then considered in effect a tax that falls on those who hold money, thus inflation of the money supply in the long run , will reduce the purchasing power of the currency.

An increase in nominal money growth leads to small reduction in real money balances. Thus, higher money growth leads to an increase in seigniorage, When nominal money growth is very high. However the reduction in real money balances induced by higher nominal money growth becomes larger and larger. Thus Seignoriage firstly increases with increase in money supply then after an optimum level decreases with increase in money supply. This phenomenon will be the replica of Laffer curve.

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