Volume 25, Issue 1 (2025)
QJER 2025, 25(1): 63-89 |
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Rashid Shamkhal A, Paykarjou K, Akbari Moghaddam B. Good Governance and Seigniorage in a Selected OPEC Countries and Iran. QJER 2025; 25 (1) : 3
URL: http://ecor.modares.ac.ir/article-18-73395-en.html
URL: http://ecor.modares.ac.ir/article-18-73395-en.html
1- Ph. D. Student, Islamic Azad University of Tehran Science and Research Branch, Tehran, Iran
2- Assistant Professor at Islamic Azad University of Tehran Science and Research Branch, Tehran, Iran ,dr.k.peykarjou@gmail.com
3- Associate professor at Islamic Azad University of Qazvin Branch, Qazvin, Iran
2- Assistant Professor at Islamic Azad University of Tehran Science and Research Branch, Tehran, Iran ,
3- Associate professor at Islamic Azad University of Qazvin Branch, Qazvin, Iran
Abstract: (516 Views)
Aim and Introduction
Seigniorage, in addition to being a crucial economic tool, holds a significant position in terms of governance for governments. The way governments manage the power obtained through seigniorage can be influenced by granting independence to the central bank or by adhering to principles of good governance within social institutions. Good governance has several positive effects on government revenues and efficiency. While the use of seigniorage may initially appear as a natural right of governments, if it leads to a faster growth rate of money compared to economic growth, it can result in inflation and impose inflationary taxes.
According to the theory of financial dominance, the practice of monetizing deficits undermines the independence of the central bank, rendering it unable to exercise proper monetary control and policymaking. In countries that are members of the OPEC cartel, where government budgets are often closely tied to oil revenues, budget deficits can be influenced by fluctuations in oil prices, which can incentivize governments to use seigniorage more frequently. Additionally, in the context of good governance, covering up government inefficiency and corruption can also serve as an incentive for increased use of seigniorage. This research focuses on exploring the relationship between good governance and seigniorage in OPEC member countries that have access to oil revenues.
Methodology
This study has employed a panel vector autoregression model to investigate the relationship between good governance and seigniorage among the member countries of the Organization of the Petroleum Exporting Countries (OPEC) during the period of 1995-2020.
Findings
Among the OPEC members, four out of the six facets of good governance were found to have a negative correlation with the government's use of seigniorage. However, no statistically significant correlation was observed between other facets, namely changes in political stability and the absence of violence and terrorism, government effectiveness, and the government's use of seigniorage. The findings also indicated long-term effects of good governance shocks, as an institutional factor, on seigniorage, lasting for up to seven years. Therefore, this study cautiously confirms the negative correlation between the good governance index and the government's use of seigniorage.
Discussion and Conclusion
In OPEC member countries, where governments also control oil revenues, good governance can play a role in managing these revenues. Oil revenues have two effects on government decisions; an income effect and a monetary effect. In terms of income, it increases the government's available revenues, while in terms of money, it can contribute to the country's monetary base. However, unless the domestic equivalent of money is received from the central bank and introduced into the domestic economy, it does not lead to a change in the monetary base and inflationary effects. In countries with active and effective social institutions, better governance enables governments to use oil revenues more efficiently, often directing them towards investment funds to increase the country's wealth. Therefore, the impact of oil revenues on seigniorage in OPEC member countries is determined by the combined effect of these two outcomes. Furthermore, good and efficient governance by the government leads to a reduction in government expenditures, subsequently reducing the need for inflationary financing and the use of seigniorage. Good governance, considering factors such as responsiveness and the political costs of the government when using seigniorage, increases the costs and reduces the government's inclination to rely on inflationary financing.
The research results did not indicate a negative relationship between the variables of "political stability and absence of violence/terrorism" and "government effectiveness." Several factors may contribute to this finding, including the fact that the studied countries are developing nations where government expenditures increase significantly with improved political stability through development programs. Moreover, except for Kuwait and the United Arab Emirates, the government's efficiency in most OPEC member countries is somewhat negative and exhibits low volatility, which may explain the lack of significant impact from changes in government effectiveness on seigniorage.
As various studies have confirmed, improving good governance has positive effects on economic growth. With some caution, this research suggests that enhancing good governance leads to less inflationary financing and reduced government reliance on seigniorage. Therefore, establishing the necessary conditions for better governance in OPEC member countries can help curb inflation, which is one of the main consequences of the government's reliance on seigniorage. Establishing good governance based on appropriate economic, political, cultural, and social structures is feasible, but the decision and willingness of rulers to implement it undoubtedly remain among the most influential factors in this endeavor.
The investigation of good governance and the seigniorage in Iran also demonstrates that Iran relies more on the average OPEC members for inflationary financing or using the seigniorage, and its governance indicators are lower than the selected countries' average. Therefore, based on the results obtained from the analysis of responce functions in empirical analysis, it is essential to pay attention to changing and improving the methods of governance and administration of the country. This way, monetary governance can be improved, and the government's use of the seigniorage can be limited
Seigniorage, in addition to being a crucial economic tool, holds a significant position in terms of governance for governments. The way governments manage the power obtained through seigniorage can be influenced by granting independence to the central bank or by adhering to principles of good governance within social institutions. Good governance has several positive effects on government revenues and efficiency. While the use of seigniorage may initially appear as a natural right of governments, if it leads to a faster growth rate of money compared to economic growth, it can result in inflation and impose inflationary taxes.
According to the theory of financial dominance, the practice of monetizing deficits undermines the independence of the central bank, rendering it unable to exercise proper monetary control and policymaking. In countries that are members of the OPEC cartel, where government budgets are often closely tied to oil revenues, budget deficits can be influenced by fluctuations in oil prices, which can incentivize governments to use seigniorage more frequently. Additionally, in the context of good governance, covering up government inefficiency and corruption can also serve as an incentive for increased use of seigniorage. This research focuses on exploring the relationship between good governance and seigniorage in OPEC member countries that have access to oil revenues.
Methodology
This study has employed a panel vector autoregression model to investigate the relationship between good governance and seigniorage among the member countries of the Organization of the Petroleum Exporting Countries (OPEC) during the period of 1995-2020.
Findings
Among the OPEC members, four out of the six facets of good governance were found to have a negative correlation with the government's use of seigniorage. However, no statistically significant correlation was observed between other facets, namely changes in political stability and the absence of violence and terrorism, government effectiveness, and the government's use of seigniorage. The findings also indicated long-term effects of good governance shocks, as an institutional factor, on seigniorage, lasting for up to seven years. Therefore, this study cautiously confirms the negative correlation between the good governance index and the government's use of seigniorage.
Discussion and Conclusion
In OPEC member countries, where governments also control oil revenues, good governance can play a role in managing these revenues. Oil revenues have two effects on government decisions; an income effect and a monetary effect. In terms of income, it increases the government's available revenues, while in terms of money, it can contribute to the country's monetary base. However, unless the domestic equivalent of money is received from the central bank and introduced into the domestic economy, it does not lead to a change in the monetary base and inflationary effects. In countries with active and effective social institutions, better governance enables governments to use oil revenues more efficiently, often directing them towards investment funds to increase the country's wealth. Therefore, the impact of oil revenues on seigniorage in OPEC member countries is determined by the combined effect of these two outcomes. Furthermore, good and efficient governance by the government leads to a reduction in government expenditures, subsequently reducing the need for inflationary financing and the use of seigniorage. Good governance, considering factors such as responsiveness and the political costs of the government when using seigniorage, increases the costs and reduces the government's inclination to rely on inflationary financing.
The research results did not indicate a negative relationship between the variables of "political stability and absence of violence/terrorism" and "government effectiveness." Several factors may contribute to this finding, including the fact that the studied countries are developing nations where government expenditures increase significantly with improved political stability through development programs. Moreover, except for Kuwait and the United Arab Emirates, the government's efficiency in most OPEC member countries is somewhat negative and exhibits low volatility, which may explain the lack of significant impact from changes in government effectiveness on seigniorage.
As various studies have confirmed, improving good governance has positive effects on economic growth. With some caution, this research suggests that enhancing good governance leads to less inflationary financing and reduced government reliance on seigniorage. Therefore, establishing the necessary conditions for better governance in OPEC member countries can help curb inflation, which is one of the main consequences of the government's reliance on seigniorage. Establishing good governance based on appropriate economic, political, cultural, and social structures is feasible, but the decision and willingness of rulers to implement it undoubtedly remain among the most influential factors in this endeavor.
The investigation of good governance and the seigniorage in Iran also demonstrates that Iran relies more on the average OPEC members for inflationary financing or using the seigniorage, and its governance indicators are lower than the selected countries' average. Therefore, based on the results obtained from the analysis of responce functions in empirical analysis, it is essential to pay attention to changing and improving the methods of governance and administration of the country. This way, monetary governance can be improved, and the government's use of the seigniorage can be limited
Article number: 3
Article Type: Original Research |
Subject:
Macroeconomics and Monetary Economics
Received: 2024/01/13 | Revised: 2025/02/18 | Accepted: 2024/01/20 | Published: 2025/02/18
Received: 2024/01/13 | Revised: 2025/02/18 | Accepted: 2024/01/20 | Published: 2025/02/18
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