lecture18 - Economics 202A Lecture Outline, November 27,...

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Economics 202A Lecture Outline, November 27, 2007 (Version 1.2) Maurice Obstfeld Government Revenue from Money Creation In general the central government has a monopoly right to issue money, and that privilege is a source of revenue. This lecture shows how to integrate money creation by the central government into national budgetary accounts. They relate the discussion to the notion of the revenue-maximizing rate of monetary growth. For a classic application, see the paper on \Unpleasant Monetarist Arithmetic" by Sargent and Wallace. What is seigniorage? If the private sector is willing to hold paper money that the government supplies, the government can buy real goods and services that the private sector produces with money that is (virtually) costless for the government to print. 1 The real resources that the government acquires in this way equal its seigniorage the private sector is willing to accept the government’s &at money; all that matters is that there is a demand for it. In a discrete time mode, seigniorage in period t is given by M t M t 1 P t ; that is, it is the real resources the government acquires through increases in the nominal money balances the public is willing to hold. A useful way to rewrite this expression is as M t M t 1 P t = t m t 1 + ( m t m t 1 ) ; (1) 1 Money that is not backed by a real commodity (such as gold) is called . 1
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where t ( P t ± P t 1 ) =P t and m M=P . This expression emphasizes two must give to the government to hold their real money balances constant in that face of rising prices. 2 Second is the public’s desire to alter its real continuous time. Seigniorage at time t is _ M ( t ) P ( t ) = ( t ) m ( t ) + _ m ( t ) ; as you can easily check. Observe that seigniorage need not tax revenue, which is only. An important theoretical concept is the revenue-maximizing steady-state : what is the highest rate at which we can squeeze golden eggs out of the proverbial goose? It turns out that the concept is slightly am- biguous, and for a reason that lies at the heart of discussions over time inconsistency in monetary policy. One approach to the problem is to simply maximize
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lecture18 - Economics 202A Lecture Outline, November 27,...

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