How much money any country's government can create(paper money r fiat money)?

Question

is there any restrictions on money creation by world bank or any other source? If one country create more fiat money, what will be the effect on its currency exchange rate?

Answer 1

There are three limits, political will, optimal levels to maximize government revenue, and optimal levels to maximize the well being of the public.

The Federal Reserve is independent in the United States because what is in the best interest of George Bush or Nancy Pelosi may not be in your best interest. Congress oversees the Federal Reserve and the President appoints its members, but it acts as a bank to the United States and to member banks.

In some countries the limit is a political limit, how much can the government promise to stay in power versus the likelihood of armed revolution created by inflation and the inability to acquire goods from across borders. Hitler arose precisely because of out of control inflation. So, in the United States, the Fed's job is to act as a fiduciary to limit the ability of elected officials to simply plunder the country. In a sense, our elected officials do not trust themselves, and so handed power over to an independent body whose job is to make sure that the economy is stable.

Now there are two operational limits that the Federal Reserve looks at, what maximizes government revenue and what maximizes personal wealth. It turns out they are not the same number.

There is a theoretical value, not used in the United States, to estimate the optimum combination of seigniorage and taxes. Seigniorage is the revenue the government makes from issuing currency. If the government prints more than that amount the added costs to the government from inflation exceed the revenue from the people and so there is an upper boundary at which point the government is actually losing ground from printing.

The optimum value to maximize the revenue of the citizen, but not the government, is to print enough to cover increases in production due to technology shifts plus an amount to cover the change in per capita consumption due to immigration, births and deaths. In addition, there is a slight bias in favor of inflation because deflation can have tragic economic consequences.

Currency is a form of non-interest bearing debt from the government to its people, usable for the payment of taxes. It is also useful for other things, but that is not its legal purpose. It is a debt, just like bills, notes and bonds, but unlike them in that it does not pay interest. There is a practical limit to how much non-interest bearing debt the public will accept without demanding interest. To the extent that money adds value by facilitating transactions, the people will accept additional money, but money always loses to interest bearing accounts, so people will minimize their money holdings. Excess money will be disposed of in the goods market creating inflation or in the capital markets creating a potentially devastating bubble.

Seigniorage is used by some countries, in particular Latin American countries, in lieu of taxation because they lack the information infrastructure to effectively collect taxes.  Seigniorage and taxes combined can be optimized and so a reduction in taxes can be offset by any government by an increase in seigniorage, but as mentioned above if seigniorage crosses a limit, the governments revenue actually falls because the cost to acquire services by the government rises faster than the seigniorage revenue.

The restriction is that a limit exists after which the government begins to self destruct.

In a flexible exchange rate economy, the nation increasing its money supply in excess of technology, births, immigration less deaths the most as a percentage will see its currency slip in exchange rates, other things constant.

A fixed exchange rate economy has no such problem, but its economy becomes less tenable as its central bank will have increasing difficulty defending its own currency peg.

There are some practical limits external to a country as well.  Currency shocks happen from time to time, particularly in the major economies, as statistical runs cause one currency to be over accumulated or under accumulated over time.  The dynamics of which are poorly understood.  The runs appear to be discretely Cauchy distributed and not binomially distributed allowing very large excess accumulations to occur, shocking an economy.  These shocks can limit a country's ability to create money or trigger excess money creation because external parties need their money.

Answer 2

there is no international restriction limiting how much paper money a country can print. however, countries choose not to because it makes the currency worth less and increases inflation.