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Q18. [E] The following graph shows the level of seignorage (as a % of GDP) revenue for Argentina from 1884 to 2000 and the inflation rate from 1913-2000 Inflation and Seignorage in Argentina 20% 40 35 15% 30 25 10% 20 15 10 0% O 1901 1941 1945 1949 1937 1965 1989 1889 1905 1893 1961 1993 1897 1957 1969 1977 1985 1885 1913 1925 1953 1973 1981 1909 1921 1997 1917 -5 5% -10 -Seignorage (left axis) Inflation (right axis) (a) What does it mean to have negative seignorage revenue? Negative seignorage revenue occurs when there is a contraction in the money supply. You can imagine this as the central bank selling government bonds and absorbing the cost. (b) Describe the relationship between inflation and seignorage. Why is seignorage sometimes described as an inflation tax? Higher rates of inflation tend to increase the rates of seignorage revenue. Seignorage revenue is sometimes referred to as an inflation tax because inflation decreases the real value of money held, whilst generating revenue for the government. (c) How well correlated are inflation and seignorage revenue in these two graphs. What reasons could there be for divergence? Inflation and seignorage are in the most part fairly well correlated over the course of the period shown. Notable is how, despite inflation being vastly higher from 1973-1990 compared to 1940-1960, the level of seignorage revenue was roughly similar. This is due to the fact that money demand held up reasonably well in the first period compared to the second, when holding any money represented a large risk