Financing Budget Deficits by Seigniorage and Implicit Taxation: The Cases of Spain and Portugal

This paper evaluates the contribution of seigniorage and implicit taxation of financial intermediation to the financing of the budget deficits in Spain and Portugal during the 1980s. The paper starts with a simple partial equilibrium model of the banking sector, which is used to derive two sets of comparative static results related to the main policy instruments used by the Spanish and the Portuguese central banks, namely reserve requirements and credit ceilings. Both control mechanisms amount to an implicit tax on financial intermediation, whose revenue can be added to seigniorage. The paper sets out an analytical framework, based on a particular formalization of the government intertemporal budget constraint, which justifies the measures of seigniorage and implicit taxation that are computed for the period 1980-1990. The results show that this source of revenue is very significant: its average value for the 1980s is 1.71% of GDP for Spain and 3.98% of GDP for Portugal.