Central banks and seigniorage: A study of three economies in transition

Abstract

The paper examines the relations between central banks and other macro sectors in the Czech Republic, Hungary, Romania, with respect to the creation and distribution of seigniorage, taking Austria and Germany as a reference. In economies in transition, transfers of seigniorage from the central bank to the government and to the banking sector may appear as a natural way to soften the financial constraints of both sectors. We propose a simple framework for the analysis of central bank seigniorage, based on the opportunity cost approach, and measure both the amount and allocation of seigniorage for the five countries in 1993. We find central bank seigniorage to be approximately four times our benchmark value in Hungary, and thirty times in Romania (the latter due to the high level of the inflation tax). In Hungary and Romania most seigniorage is appropriated (as an interest rate subsidy) by the government; in Romania a large part also goes as a subsidy to the financial sector. In none of the five countries we find that central banks retain an excessive amount of seigniorage for reserve accumulation or for current expenditures. In the last part of the paper we discuss the implications of our findings on seigniorage for the evaluation of central bank independence vis-à-vis the government.