February 26, 2019

Printing currency isn’t a good way to finance deficit

In this Mint aritcle, Resident Senior Fellow Vivek Dehejia evaluates the macroeconomic consequences of printing currency as a way to finance the fiscal deficit. Excerpts:


"The bottom line is that in advanced economies, seigniorage revenue is of little importance and is basically a byproduct of the existence of a monopoly fiat currency. Its greater use in emerging economies reflects underdeveloped fiscal systems, poorly functioning financial markets and governments’ lack of creditworthiness. Summarizing the political economy research, economists Alex Cukierman, Sebastian Edwards and Guido Tabellini in a 1992 research paper in the American Economic Review wrote, “high seigniorage, low central bank independence and high regime instability are likely to appear together".


It gets worse for an inflation-targeting central bank, such as in India. Increased reliance on seigniorage will lead to increased money growth and this will require the RBI to “sterilize" the incipient increase in money supply through offsetting open market operations or other means to prevent inflation from rising above target. So, the increased use of seigniorage in an inflation-targeting regime is likely to be self-defeating. The only way an Indian government could generate substantially more revenues from seigniorage is if it is willing to tolerate substantially and permanently higher inflation, which would require, sooner or later, rubbishing the monetary policy framework enshrined in the RBI Act, to say nothing of the Fiscal Responsibility and Budget Management Act of 2003."


Read the whole article here.

Topic : State Capacity / In : OP-EDS
x Close Window

Please verify your email address to access this content