Seigniorage is the profit obtained by the government by printing new money within a specified period. Benefits represent the difference between the face value of a currency and the costs of producing it.
At present, the term also refers to the government’s ability to obtain goods and services in return for newly created money.
Seigniorage calculation
Say, the government prints Rp10,000 banknotes. The nominal value of the money is undoubtedly far higher than the paper used to print it. The greater the difference, the higher the profit. It also gets more prominent when it involves a substantial volume of money printing.
We can calculate seigniorage by subtracting the cost of making and distributing money from its market value. If it costs Rp2,000 to produce Rp10,000 in denominations, the seigniorage is Rp8,000.
Paper and electronic money have a higher seigniorage than metal coins, which are more expensive to make.
Implication
Economic growth requires additional money. However, when the government expands too much, this results in inflation.
High inflation is known as hyperinflation, which is dangerous to the economy. High inflation reduces the real purchasing power of money and reduces confidence over the domestic currency.
