Bank Seigniorage in a Monetary Production Economy

By Biagio Bossone

PKES Working Paper 2111

August 2021

This article speaks to post-Keynesian economists and their fundamental vision of monetary production economies. It focuses on the role of commercial banks as creators of money in monetary production economies and studies the rent-extraction power of banks in the form of "seigniorage." The article examines how the relative size of banks in the payment system combines with their capacity to determine quantities and prices in the market for demand deposits and gives them the power to extract seigniorage from the economy; it clarifies the distinction between seigniorage originating from commercial bank money creation and profits derived from pure financial intermediation; and analyzes how seigniorage affects the economy’s price level and resource distribution. The article draws political-economy and economic-policy implications.

Keywords: Commercial banks; Interest rate; Money creation; Prices; Resource distribution; Seigniorage

JEL classification: E19 E20 E31 E40 E52 E58 E62 G21