No. 58, 1999 - Interpreting and Measuring Seigniorage: Hungary's Case

In this paper we address some issues related to the interpretation of seigniorage and present calculations on the empirical importance of its different interpretations. While doing so, we shall refer to certain macroeconomic developments in Hungary and rely on the relevant Hungarian data, but we believe that the implications of our analysis go beyond Hungarian macroeconomic and policy experiences. In our view, the considerations presented in our paper are likely to be relevant not just for Central-East European (CEE) economies, but also for other countries experiencing capital inflows and sterilised intervention at a time of relatively high domestic inflation.
In the following we wish to demonstrate that, in addition to the reasons cited in the literature, the standard definitions of seigniorage may turn out to be irrelevant, or even misleading in case of massive sterilised capital inflows. The situation had characterised several CEE countries since the mid-1990s until mid-1998, the outbreak of the Russian debt crisis. In particular, we intend to point out that under such circumstances important differences exist between the standard (i.e. the “monetary” and the “opportunity cost”) measures of seigniorage on the one hand, and actual fiscal revenues from money creation, on the other. First, under such conditions seigniorage may become a financing source of foreign exchange reserve accumulation at the central bank, rather than that of domestic fiscal imbalances. Second, and more important, if the domestic inflation rate is significantly higher than the international one, sterilised intervention and the accompanying increase in foreign reserves may involve heavy nominal fiscal costs (i.e. the differential between domestic interest paid/forgone because of sterilisation on the one hand, and the foreign interest revenues on forex reserves on the other). In fact, these fiscal costs may be much higher than either “monetary” or “opportunity cost” seigniorage.
These characteristics involve important differences compared to the former situation of countries that were also engaged in sterilised intervention at a time of capital inflows, but, like Germany and Japan, had lower inflation than the international one, as well as nominally appreciating currencies.
In the first part of the paper we review the conventional and modified interpretations of seigniorage and discuss some conceptual issues related to these interpretations. In the second part, we present calculations, based on Hungarian data, regarding the empirical magnitudes corresponding to the different concepts. We apply the framework of Neumann for classifying and measuring seigniorage, and we discuss some problems related to the interpretation of book losses on net foreign assets of central banks. Finally, we draw some conclusions.
The paper is available here.