Seigniorage Revenue and Monetary Policy

Money creation is one potential source of revenue for a government. Seigniorage—government revenue received through creating money—is a relatively inexpensive means of raising funds. The problem is that although money may be cheap to produce, the social costs of money creation are almost certainly greater than what the Federal Reserve pays to create it. Indeed, a large body of empirical evidence suggests that the rate of money creation is closely correlated with inflation. The cross-country evidence indicates a positive association between the monetary policy measure and a country’s reliance on seigniorage revenue. The measure of financial sophistication should depend on the monetary policy settings to get an accurate estimate of the coefficient between monetary policy and seigniorage reliance. The main finding in this article is that there is a systematic, positive relationship between a country’s monetary policy settings and its reliance on seigniorage revenue.