IDEAS home Printed from https://ideas.repec.org/p/nip/nipewp/12-2005.html
   My bibliography  Save this paper

The Political Economy of Seigniorage

Author

Abstract

While most economists agree that seigniorage is one way governments finance deficits, there is less agreement about the political, institutional and economic reasons for relying on it. This paper investigates the main determinants of seigniorage using panel data on about 100 countries, for the period 1960-1999. Estimates show that greater political instability leads to higher seigniorage, especially in developing, less democratic and socially-polarized countries, with high inflation, low access to domestic and external debt financing and with higher turnover of central bank presidents. One important policy implication of study is the need to develop institutions conducive to greater economic freedom as a means to lower the reliance on seigniorage financing of public deficits. Classification-JEL: E31, E63.

Suggested Citation

  • Ari Aisen & Francisco José Veiga, 2005. "The Political Economy of Seigniorage," NIPE Working Papers 12/2005, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:12/2005
    as

    Download full text from publisher

    File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2005/NIPE_WP_12_2005.PDF
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Albanesi, Stefania, 2007. "Inflation and inequality," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1088-1114, May.
    2. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    3. Dollar, David & Kraay, Aart, 2002. "Growth Is Good for the Poor," Journal of Economic Growth, Springer, vol. 7(3), pages 195-225, September.
    4. Hibbs, Douglas A., 1977. "Political Parties and Macroeconomic Policy," American Political Science Review, Cambridge University Press, vol. 71(4), pages 1467-1487, December.
    5. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
    6. Durlauf, Steven N. & Johnson, Paul A. & Temple, Jonathan R.W., 2005. "Growth Econometrics," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.),Handbook of Economic Growth, edition 1, volume 1, chapter 8, pages 555-677, Elsevier.
    7. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
    8. Aisen, Ari & Veiga, Francisco Jose, 2006. "Does Political Instability Lead to Higher Inflation? A Panel Data Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1379-1389, August.
    9. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    10. Cukierman, Alex & Webb, Steven B, 1995. "Political Influence on the Central Bank: International Evidence," The World Bank Economic Review, World Bank, vol. 9(3), pages 397-423, September.
    11. Aizenman, Joshua, 1992. "Competitive Externalities and the Optimal Seigniorage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 61-71, February.
    12. Beetsma, Roel M W J & van der Ploeg, Frederick, 1996. "Does Inequality Cause Inflation?: The Political Economy of Inflation, Taxation and Government Debt," Public Choice, Springer, vol. 87(1-2), pages 143-162, April.
    13. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 583-603, May.
    14. Joydeep Bhattacharya & Helle Bunzel & Joseph Haslag, 2005. "The non-monotonic relationship between seigniorage and inequality," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 500-519, May.
    15. Click, Reid W., 2000. "Seigniorage and conventional taxation with multiple exogenous shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1447-1479, September.
    16. Philippe Aghion & Steven Durlauf (ed.), 2005. "Handbook of Economic Growth," Handbook of Economic Growth, Elsevier, edition 1, volume 1, number 1.
    17. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," The World Bank Economic Review, World Bank, vol. 6(3), pages 353-398, September.
    18. Click, Reid W, 1998. "Seigniorage in a Cross-Section of Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 154-171, May.
    19. Desai, Raj M. & Olofsgard, Anders & Yousef, Tarik M., 2005. "Inflation and inequality: does political structure matter?," Economics Letters, Elsevier, vol. 87(1), pages 41-46, April.
    20. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
    21. Woo, Jaejoon, 2003. "Economic, political, and institutional determinants of public deficits," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 387-426, March.
    22. Carlos A. Végh, 1989. "Government Spending and Inflationary Finance: A Public Finance Approach," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 657-677, September.
    23. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
    24. Mr. Stanley Fischer & Ms. Ratna Sahay & Mr. Carlos A. Végh Gramont, 2002. "Modern Hyper- and High Inflations," IMF Working Papers 2002/197, International Monetary Fund.
    25. Woo, Jaejoon, 2005. "Social polarization, fiscal instability and growth," European Economic Review, Elsevier, vol. 49(6), pages 1451-1477, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. César Calderón & Klaus Schmidt-Hebbel, 2010. "What Drives Inflation in the World?," RBA Annual Conference Volume (Discontinued), in: Renée Fry & Callum Jones & Christopher Kent (ed.),Inflation in an Era of Relative Price Shocks, Reserve Bank of Australia.
    2. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.
    3. Carsten Hefeker, 2010. "Taxation, corruption and the exchange rate regime," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 338-346, March.
    4. Ari Aisen & Francisco Veiga, 2008. "Political instability and inflation volatility," Public Choice, Springer, vol. 135(3), pages 207-223, June.
    5. Adnan Haider & Musleh ud Din & Ejaz Ghani, 2011. "Consequences of Political Instability, Governance and Bureaucratic Corruption on Inflation and Growth: The Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(4), pages 773-807.
    6. Woo, Jaejoon, 2011. "Growth, income distribution, and fiscal policy volatility," Journal of Development Economics, Elsevier, vol. 96(2), pages 289-313, November.
    7. Frankel, Jeffrey, 2010. "Monetary Policy in Emerging Markets," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 25, pages 1439-1520, Elsevier.
    8. Nolivos, Roberto Delhy & Vuletin, Guillermo, 2014. "The role of central bank independence on optimal taxation and seigniorage," European Journal of Political Economy, Elsevier, vol. 34(C), pages 440-458.
    9. Binder, Carola, 2019. "Inequality and the inflation tax," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    10. Paresh Kumar Narayan & Seema Narayan & Sagarika Mishra, 2011. "Do Remittances Induce Inflation? Fresh Evidence from Developing Countries," Southern Economic Journal, John Wiley & Sons, vol. 77(4), pages 914-933, April.
    11. Seghezza, Elena & Morelli, Pierluigi, 2014. "Conflict inflation and delayed stabilization," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 171-184.
    12. Mijiyawa, Abdoul, 2008. "Inflation and Democracy in Former Extractive Colonies Analysis with a New Instrumental Variable," Proceedings of the German Development Economics Conference, Zurich 2008 28, Verein für Socialpolitik, Research Committee Development Economics.
    13. Sabaté, Marcela & Fillat, Carmen & Escario, Regina, 2019. "Budget deficits and money creation: Exploring their relation before Bretton Woods," Explorations in Economic History, Elsevier, vol. 72(C), pages 38-56.
    14. Krause, Stefan & Méndez, Fabio, 2008. "Institutions, arrangements and preferences for inflation stability: Evidence and lessons from a panel data analysis," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 282-307, March.
    15. Mr. A. J Hamann & Mr. Alessandro Prati, 2002. "Why Do Many Disinflations Fail? the Importance of Luck, Timing, and Political Institutions," IMF Working Papers 2002/228, International Monetary Fund.
    16. Harashima, Taiji, 2008. "A Microfounded Mechanism of Observed Substantial Inflation Persistence," MPRA Paper 10668, University Library of Munich, Germany.
    17. Jácome, Luis I. & Vázquez, Francisco, 2008. "Is there any link between legal central bank independence and inflation? Evidence from Latin America and the Caribbean," European Journal of Political Economy, Elsevier, vol. 24(4), pages 788-801, December.
    18. Mr. Jean-Claude Nachega, 2005. "Fiscal Dominance and Inflation in the Democratic Republic of the Congo," IMF Working Papers 2005/221, International Monetary Fund.
    19. Koreshkova, Tatyana A., 2006. "A quantitative analysis of inflation as a tax on the underground economy," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 773-796, May.
    20. Lin, Hsin-Yi & Chu, Hao-Pang, 2013. "Are fiscal deficits inflationary?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 214-233.

    More about this item

    Keywords

    Seigniorage; political instability; institutions.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nip:nipewp:12/2005. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: NIPE (email available below). General contact details of provider: https://edirc.repec.org/data/nipampt.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.