Printing money to finance additional government spending ie seignorage offers

Printing money to finance additional government

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Printing money to finance additional government spending, i.e., seignorage offers only limited room for the creation of fiscal space and should be subordinated to the broader objectives of monetary policy, viz., the creation of sufficient liquidity to support an economy’s real growth, preferably on a relatively noninflationary basis. In the normal course of growth, seignorage consistent with a modest single digit rate of inflation— perhaps on the order of 0.5-1.0 percent of GDP, is created annually, with the associated resources flowing to the government, usually in the form of the profit remittances from the central bank (see IMF, 2005b). Some NGOs have advocated that higher rates of monetary creation, even at the cost of higher inflation, should be explored as a mechanism for financing increased health outlays. But there are dangers to this approach. Not only does an inflation rate above 10-12 percent of GDP disproportionately hurt the poor (because they are least able to adjust for the loss in their real income), but high inflation is also a deterrent to efficient investment policies. 1 Except in situations where inflation is being gradually brought down from hyperinflationary levels, it would be unusual for the IMF to endorse a program that explicitly targets an inflation rate above 10-12 percent. Thus, in the cases of Malawi and Zambia, the task remains to bring inflation rates down to single digits. Issues that arise in the creation of fiscal space 1 . Moreover, as inflation increases, the likely fall in the demand for money actually reduces the amount of fiscal space that can be created through seignorage for any given level of inflation. 6
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The foregoing discussion merely lays out the possibilities for how fiscal space can be created. But there are a number of issues that bear on the usability of the resources thereby created. The role of macroeconomic constraints: Are there limits to the amount of grants and loans that a country can or should absorb? The finance ministry and central bank must operationally contend with judging the macroeconomic impact of higher grant flows on the exchange rate (the so-called “Dutch Disease” concern that higher foreign exchange inflows lead to an appreciation of the currency). This is not easy, since the extent of the impact is affected by how the grants are used—whether for imports or what economists call “nontraded” goods and services. The government’s financial authorities may thus be wary about such an appreciation because of its adverse effect on the competitiveness and profitability of export industries. In this regard, these financial sector officials may have a different perspective than a minister of education or health on the relative benefits of higher grant flows. While the empirical evidence is mixed as to whether higher grants would lead to an appreciation of the currency, two points are worth noting. First, many countries act as if the Dutch Disease issue is a potential problem, as witnessed by their efforts to use monetary policy tools to prevent a currency appreciation (with adverse consequences in terms of domestic interest rates) (see IMF, 2005). Second, the likelihood
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  • Spring '14
  • KevinP.Moenkhaus

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