Fiscal Seigniorage “Laffer-curve effect†on Central Bank Autonomy in India

Lekha Chakraborty

Working Papers from eSocialSciences

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 fiscal 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 fiscal seigniorage Laffer curve.

Keywords: Fiscal-Monetary Policy Co-ordination; Seigniorage; Fiscal Deficits; error correction mechanism; Seigniorage Laffer Curve; public sector deficit; economy; emerging; developing countries; full employment; macroeconomic policies; financing; debt; central banks; inflation rate; Indian data; error correction (search for similar items in EconPapers)
Date: 2015-11
Note: Institutional Papers
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