A part of these balances will be in the form of currencies issued by the Central Bank, for which the Central Bank pays no interest. Secondly, the government may “tax” existing real balances by creating additional money and causing inflation. Inflation tax - as it is often called - is a kind of forced savings, which enables the government to acquire goods and services.
In a number of countries, inflation tax revenue is an important part of government income. 5  BIS Review 127/1999  As a member of the CMA, the scope for inflationary financing is limited. Based on our discussions earlier, the ability to increase real balances in line with growing productivity, and hence generate seignorage, could be constrained by strict backing rules.