Selfless Seigniorage

NEW YORK – As the central banks of major developed economies have intensified quantitative easing (QE, or large-scale purchases of government bonds and other long-term securities), developing-country leaders have increasingly voiced concern about the policy’s adverse impact on their economies’ stability and growth. They cite the dangers of volatile capital inflows, commodity-price fluctuations, and local-currency appreciation, as well as the attendant risks of asset bubbles and inflation.

Developed-country policymakers do not deny these spillover effects. Rather, they contend that QE’s positive externalities – namely, a stronger recovery in developed economies – will ultimately offset them.

But one issue seems to have been neglected by both sides. QE has enabled developed economies to collect a massive amount of international seigniorage (the interest that a central bank earns on the assets that it holds against the currency that it issues, or the annual increment in the monetary base) from developing countries.

Since the global financial crisis erupted in 2008, developed-country central banks have used QE to expand their balance sheets significantly. The total value of assets held by the US Federal Reserve, for example, has ballooned from 7% of GDP in 2007 to roughly 20% of GDP today. The four major central banks – the Fed, the European Central Bank, the Bank of Japan, and the Bank of England – have accumulated roughly $5 trillion of additional assets in the last five years, bringing their total to $9.5 trillion.