Central Bank Independence and Seigniorage: The Banque de France

One prominent characteristic of independent central bank is the legal limitation of the central bank's lending to the government. Although a priori we expect a strong link between the legal restriction on central bank credit to the government and seigniorage, the empirical cross-country evidence in favour of this hypothesis is rather tenuous pointing to a poor compliance to these restrictions. On balance, these cross-section studies suggest that, though central bank independence is not a sufficient condition to avoid excessive expansion of the monetary base, at best it can be considered a necessary condition. In this paper we intend to supplement the cross-section evidence through a case study of regime changes in a single country. The case of France is particular interesting as the French monetary system was highly administered until 1985 when radical reforms were implemented. These events are reflected in the development of seigniorage revenue.