The political economy of seigniorage

While most economists agree that seigniorage is one way governments finance deficits, there is less agreement about the political, institutional and economic reasons for relying on it. This paper investigates the main political and institutional determinants of seigniorage using panel data on about 100 countries, for the period 1960–1999. Estimates show that greater political instability leads to higher seigniorage, especially in developing, less democratic and socially-polarized countries, with high inflation, low access to domestic and external debt financing and with higher turnover of central bank presidents. One important policy implication of this study is the need to develop institutions conducive to greater political stability as a means to reduce the reliance on seigniorage financing of public deficits.The authors acknowledge the helpful comments from Christopher Bowdler, Juan Jauregui, Delfim Neto, Carlos Végh, Robert Flood, Paolo Mauro, various staff members from the International Monetary Fund, two anonymous referees, and the editor, Lant Pritchett. We also thank Reid Click for sharing his data on creditworthiness ratings. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Francisco Veiga wishes to thank the Portuguese Foundation for Science and Technology (FCT) for research grant POCI/EGE/55423/2004 (partially funded by FEDER)