Rogoff on Seigniorage

In his book, The Curse of Cash, Harvard economist Ken Rogoff offers an excellent discussion of the modern seigniorage process:

Instead of having the government print money and buy things directly, modern-day seigniorage is a three stage process. In stage one, the government spends beyond its means (its tax revenues) and issues interest-bearing debt to cover the difference. In stage two, the central bank—a fully owned subsidiary of the government—issues electronic bank reserves (which are the electronic equivalent of cash) and uses the proceeds to buy up government debt. Over time, the central bank usually earns a profit, because the longer-term debt it typically buys usually pays a higher rate than the bank reserves it issues. In stage three, the central bank turns over any revenue in excess of its expenses to the government. It is all very civilized […] From an accounting point of view, however, the three-stage process boils down to the same thing as if the government just purchased goods directly with its money creation. (One can occasionally find autocratic and populist governments today that still sometimes do things the medieval way, dispensing with the niceties of open market operations and having the central bank ship truckloads of cash directly to the government to spend. The Kirchner era in Argentina (2003-2015) famously had little regard for central bank independence.)

I’ll have much more to say about Rogoff’s book in the coming weeks.

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