Seignorage, Exchange Rate, and Monetary Policy Flexible Exchange Rates and Prices

seigniorage Seigniorage: The revenue from issuing currency. Net seigniorage is the difference between the cost of putting money into circulation and the value of the goods the money will buy. One way to think of seigniorage is as a flow of revenue over time. Notes and coins pay no interest. Somebody who holds notes could instead buy a bond and earn interest on it. By holding notes it is as if he is giving the issuing government an interest-free loan.

US Seigniorage For the U.S. government, net seigniorage from issuing dollars, as measured by the flow of payments the Federal Reserve System makes to the Treasury, is roughly $25 billion a year. That is a large amount in dollar terms, but it is less than 1.5 percent of total federal government revenue and only about 0.3 percent of the GDP of the United States. When foreigners hold dollar notes, they create seigniorage for the U.S. government. As was mentioned, foreigners are estimated to hold 55 to 70 percent of the total value dollar notes in circulation, which implies that they account for perhaps $15 billion a year of the seigniorage from issuing dollars.