0 the profit that a government makes from printing its own money: --
What is true is that government assets always equal the present value of future public spending, and so, there is never a need to supplement the budget with seigniorage revenue.
Further, the equilibrium level of money stock is lower than the one in the fixedprice case, which maximizes frequency of trade (or liquidity effect) and seigniorage.
This paper develops a dynamic model of seigniorage in which economies' equilibrium paths reflect the ongoing strategic interaction between an optimizing government and a rational public.
This drives down the equilibrium money stock to the level where the liquidity effect net of the price effect is matched by the seigniorage effect.
Agents pay a seigniorage tax on foreign currency of 4% in our experiments. 28.
More precisely, such a seigniorage transfer promotes irreversible but productive investment, so that it may mitigate the welfare cost of holding money due to inflation.
Further, the less patient government extracts more resources via seigniorage, and therefore yields the more inflationary transition to fiat money regime.
To achieve credibility, the government must offset the benefits of seigniorage by internalizing some of the aggregate externalities generated by the issue of fiat money.
