Seigniorage: are central banks spending it wisely?

Author:Alain Ize
Position:IMF Monetary and Financial Systems Department

Page 216

Low inflation and high international reserve holdings have increased financial pressures on many central banks, heightening concerns about their efficiency and governance. A new IMF Working Paper by Alain Ize argues that the central banks facing serious governance issues are the least independent. There are also indications that many central banks, whether independent or not, could benefit from strengthening their governance through, among other steps, more transparency in financial reporting, periodic reviews of expenditures, and more systematic efforts to ensure that their services are adequately sized and priced.

Central banks' exclusive rights on currency issue give them privileged access to seigniorage-the difference between the value of money and the cost of producing a currency within an economy.

In the past, the siphoning off of seigniorage to governments raised familiar issues of fiscal dominance (monetary policy becoming hostage to fiscal policy) and inflationary finance. In recent years, many countries have taken substantive steps to curtail such linkages and enhance the independence of central banks by reforming their charters, prohibiting direct financing to governments, and getting rid of quasi-fiscal expenditures. Still, keeping seigniorage insidecentral banks has brought to the forefront issues of efficiency and governance. Is seigniorage spent "wisely"? Do central banks have adequate governance standards and safeguards?

These concerns have intensified because many central banks are seeing their financial position deteriorate. On the one hand, seigniorage has followed a clear downward trend, reflecting both declining inflation and a declining demand for currency (see chart below, left). On the other hand, the cost of carrying foreign reserves has tended to rise, reflecting an expanded accumulation of reserves (see chart below, right).

Such trends have led to sustained losses and negative capital in many central banks, triggering intense technical and political debates about the need for (as well as extent and modalities of) central bank recapitalizations.


Generating and allocating seigniorage

An empirical analysis of the 2003 audited financial statements of over 100 central banks shows very clear differences between "strong" central banks (those that have...

To continue reading

Request your trial