Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Seigniorage

A government can fund itself through seigniorage – the printing of money – but it’s a slightly dodgy business and can get out of hand very quickly; few governments today consider it a serious source of revenue.

Here’s how seigniorage works: if the government runs a deficit (G > T) that it can’t fund through borrowing, it can print an amount of money equal to G – T. Doing so allows the government to pay for all its spending today without the need to borrow or collect additional taxes.

But that sounds too good to be true. Surely someone must be paying to fund the deficit. The question is, who? The answer is surprising: everyone in the economy pays a little bit. By printing money the government creates some additional inflation, which acts to reduce the real value of people’s nominal assets, such as their cash and savings. So undertaking seigniorage is like levying an additional tax on people.

Seigniorage is a slippery slope. If a government becomes reliant on raising revenue using seigniorage, the ultimate result is the horror of hyperinflation (which you can read about in Chapter 5).


Taking in Two Views of Fiscal Policy

Most economists agree that in the long run, expansionary fiscal policy can’t lead to sustained economic growth (flip to Chapter 9 for all about expansionary – and indeed contractionary – fiscal policy). The reason is that in the long run the economy is constrained by its factors of production and level of technology.

Economists also agree that expansionary fiscal policy can boost output and reduce unemployment in the short run, because short-run prices are ‘sticky’, which means that output doesn’t have to equal its natural level.

What economists disagree about is how effective fiscal policy is at boosting output in the short run. Here we present two different views:


Standard view: Fiscal policy can have large impacts on the economy in the short run.


Ricardian view: Fiscal policy is ineffective in the long run and not very effective in the short run.