Academic journal article Journal of Money, Credit & Banking

Seigniorage in a Cross-Section of Countries

Academic journal article Journal of Money, Credit & Banking

Seigniorage in a Cross-Section of Countries

Article excerpt

Empirical investigation of the average level of seigniorage in a cross-section of (up to) ninety countries for the period 1971-1990 suggests that optimum tax theory explains up to 40 percent of the cross-country variation in seigniorage, since seigniorage is higher where its deadweight losses are probably lower and where deadweight losses from conventional taxation are probably higher, but that average government spending is not a determinant of seigniorage. Practical concerns about financing transitory government spending explain some of the remaining variation in seigniorage, and central bank independence and political instability are useful as well. In contrast, 90 percent of the cross-country variation in conventional taxation appears to be determined by the level of government spending and deadweight losses, and additional variables do not add to the results.

The revenue a government gets from its monopoly control over the creation of money--known as seigniorage--has interested economists for a long time. The original focus of the literature was on revenue maximization (Cagan 1956, Friedman 1971, Auernheimer 1974), but seigniorage was soon incorporated into theories of public finance (Baily 1956, Tower 1971, Phelps 1973). Recent investigations of seigniorage--such as Mankiw (1987), Grilli (1989), Poterba and Rotemberg (1990), and Trehan and Walsh (1990)--concentrate on models of optimum seigniorage vis-a-vis conventional taxation and empirical tests of the first-order conditions that emerge from such models. These investigations therefore focus on temporal properties, although sometimes for several countries. Compared to the amount of time series research on seigniorage, relatively little has been done on the cross-country properties of optimum tax models, or even on empirical patterns of seigniorage across countries. Fischer (1982) reports the levels of seigniorage worldwide, Canzoneri and Rogers (1990) investigate optimum seigniorage in an exclusively European context, and Cukierman, Edwards, and Tabellini (1992) relate seigniorage to political instability and a few control variables, I but no other cross-country literature is available. This paper therefore investigates seigniorage in a cross-section of countries using optimum seigniorage theory as a benchmark, and subsequently expands the analysis to include other aspects of seigniorage in public finance.

The investigation in this paper examines average levels of seigniorage in a pool of (up to) ninety countries for the period 1971-1990. Table 1 presents the countries, the average of seigniorage as a percent of GDP, and the average of seigniorage as a percent of government spending. For this data set, seigniorage on average amounts to 2 1/2 percent of GDP and finances 10 1/2 percent of government spending. Seigniorage ranges from less than 1/2 percent of GDP to more than 10 percent, and from less than 1 percent of spending to more than 100 percent. The primary question under investigation is simply, "What explains the variation of seigniorage across countries?" However, an auxiliary question designed to illuminate the answer to the primary question is, "How is this different from conventional taxation?" For the data set used, conventional taxation on average finances 78 1/2 percent of government spending, and varies from just under 50 percent to more than 100 percent. The investigation tests for the significance of different explanatory variables in regressions where seigniorage or conventional tax revenues are the dependent variables.

TABLE 1
AVERAGE ANNUAL RATES OF SEIGNIORAGE (1971-1990)

                                       Seigniorage as
                      Seigniorage as     Percent of
Country               Percent of GDP   Gov't Spending

New Zealand(*)            0.3810           1.0436
Denmark(*)                0.3943           1.0512
United States(*)          0.4295           1.9552
Canada(*)                 0. … 
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