The government's monopoly over the issue of legal tender currency gives it revenue possibilities which have been extensively discussed in the literature and often applied in practice. By varying the rate at which currency is issued, the government can alter the revenue from this source, known as seigniorage or the inflation tax. Taxation involves an involuntary transfer of resources, borrowing is a voluntary transaction.
Money creation has some of the characteristics of each.
Although it is by a set of voluntary transactions that the government issues new currency, these transactions ultimately tend to result in an involuntary losses of purchasing power for existing holders. Part of the tax is attributable to anticipated inflation, part to unanticipated. Especially in developing and transition economies, resort to the inflation tax is often an unplanned response to a fiscal crisis, often surging when other tax revenue falls off. While the most obvious economic cost of seigniorage is through the inefficiently low money holdings it induces, this is not likely to be quantitatively the most important aspect. An alternative, directly empirical, approach to the optimal choice of inflation rate is to base it on estimating the rate at which inflation begins to have serious negative impact on economic growth.