What is seigniorage and how can it affect a country's finances?

Did you know that the government can make money… simply by printing it? In economics, this concept is known as seigniorage, and it refers to the income a government can earn when the money it prints is worth more than it costs to produce.

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In other words, the term refers to the difference between the nominal value (of both banknotes and coins) and their production cost.

To better understand this, here's a hypothetical example: if it cost the Colombian government $5,000 to issue a $50,000 bill, the seigniorage would be equivalent to $45,000 , or the difference between the two amounts.

This practice gives a country the potential to earn profits by producing money. Therefore, in some cases, nations have opted to issue money when revenue from taxes or exports is insufficient. This is especially true in times of economic crisis or disasters, when immediate liquidity is needed.

Seigniorage thus functions as a monetary policy instrument that, in addition to the aforementioned, can be used to inject money into the economy, stimulate investment, support spending programs, and regulate the money supply.

It's worth noting that the above doesn't apply in all cases. In fact, in some situations, the production of currency can result in a loss rather than a profit for the government that creates it.

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So... should we print more money?

Not necessarily. While seigniorage can serve as a source of financing, it is also associated with the amount of goods or services a government can acquire by printing new banknotes.

In this context, abusing this type of instrument can lead to serious consequences in terms of inflation and monetary confidence. This is because when a government exercises seigniorage by creating new money, it increases the money supply. If this increase exceeds the growth of goods and services in the economy, it can generate inflation.

In fact, an example of a nation that has implemented this practice is Venezuela and its excessive use.

The neighboring country used seigniorage as a shortcut to solve fiscal deficits when other financing options (taxes, debt, or investment) were closed or politically unviable. From then on, it will enter a state of hyperinflation.

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