SEIGNIORAGE, DOMESTIC DEBT, AND FINANCIAL REFORM IN CHINA

This paper describes the institutional features of China's hybrid economy that have allowed the government to earn high levels of seigniorage. It quantifies both the financial benefits and implicit costs to the government of extracting seigniorage from the economy. The analysis, which is based on the inside/outside money model of Gurley and Shaw (1960), indicates that seigniorage earnings in the period 1987—1994 were large, but were earned at the cost of a rising implicit government debt and potential future inflation. The paper also outlines how the Chinese government's ability to earn seigniorage in the future may decline as the economy becomes fully monetized and as reform alters the economy's unique institutional structure.