The Monetary Mechanism of Stateless Somalia

Abstract:     
Over the last few decades, much work has focused on potential mechanisms to govern the supply of money in a desirable manner. Interestingly, a rough mechanism seems to have emerged naturally following the collapse of the Somali state in 1991. Without a functioning government to restrict the supply of notes in circulation, Somalis found it profitable to contract with foreign printers and import forged notes. Forgers were constrained since Somalis would only accept denominations issued prior to 1991; larger denomination notes could not be issued profitably. Although the exchange value of the 1000 Somali shillings note fell from $US 0.30 in 1991 to US$ 0.03 in 2008, the purchasing power eventually stabilized, as the exchange value equaled the cost of producing additional notes. After reviewing the historical episode, I make explicit the mechanism by which the supply of money is governed and compare the actual experience of Somalia to that predicted by the model. I conclude that, following the initial adjustment period, the Somali system has performed reasonably well in terms of maintaining a stable purchasing power.

Number of Pages in PDF File: 30

Keywords: Monetary Regime, Monetary Standard, Money, Somalia, Somali Shilling

JEL Classification: E41, E42

working papers series