Monetary Seigniorage in an Emerging Economy: Is there a scope for "free lunch" in financing public investment?

Lekha Chakraborty

MPRA Paper from University Library of Munich, Germany

Abstract: It is often emphasised that seigniorage financing of public sector deficits is technically a “free lunch” if the economy has not attained the full employment levels. However, conservative macroeconomic policies in many emerging and developing economies, especially in the last two decades, have moved away from seigniorage financing to debt financing of deficits to give greater autonomy to the Central Banks. Against this backdrop, the paper analyses the fiscal and monetary policy co-ordination in India by constructing a monetary seigniorage Laffer curve. If such a curve exists, it is possible to derive a seigniorage-maximizing inflation rate to estimate the optimal level of seigniorage financing of deficits. The illustrative estimates from the Indian data using error correction mechanism models confirm the possibility of a monetary Seigniorage Laffer curve.

Keywords: Fiscal-Monetary Policy Co-ordination; Seigniorage; Fiscal Deficits; error correction mechanism; Seigniorage Laffer Curve (search for similar items in EconPapers)
JEL-codes: E5 E52 E58 E62 E63 H62 (search for similar items in EconPapers)
Date: 2014, Revised 2015
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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