Fiscal Discipline & Exchange Rate Regimes': A Case for Currency Boards

35 Pages Posted: 23 Apr 2007

See all articles by Enrique Alberola

Enrique Alberola

Bank of Spain- International Dept; Bank for International Settlements (BIS)

Luis Molina

Banco de España

Date Written: August 7, 2000

Abstract

Empirical evidence shows that fixed exchange rates do not provide more fiscal discipline than flexible regimes, despite the fact that, in principle, fixing the exchange rate imposes important restrictions on seignoriage revenues. A more detailed analysis of seignoriage allows to explain the channels whereby monetary financing is possible in the short and medium run even in a exchange rate peg. More precisely, it is argued that the traditional concept of money seignoriage is misguiding and that fiscal seignoriage, defined as the actual revenues accruing to govern from the Central Bank, is a key variable to determine fiscal discipline. The paper shows that a peculiar version of fixed regimes, the currency boards, may effectively restrain fiscal policy by ruling out fiscal seignoriage. An indirect confirmation of these hypotesis is advanced by observing the empirical link between monetary seignoriage and fiscal seignoriage, and their relation with fiscal discipline.

Keywords: exchange rates, seignoriage revenues, currency boards, fiscal discipline

JEL Classification: F31, H3

Suggested Citation

Alberola, Enrique and Molina, Luis, Fiscal Discipline & Exchange Rate Regimes': A Case for Currency Boards (August 7, 2000). Banco de España Research Paper No. WP-0006, Available at SSRN: https://ssrn.com/abstract=981345 or http://dx.doi.org/10.2139/ssrn.981345

Enrique Alberola (Contact Author)

Bank of Spain- International Dept ( email )

Alcala 50
Madrid
Spain

Bank for International Settlements (BIS) ( email )

Ruben Dario 281
Polanco, Miguel Hidalgo
Mexico City, 11580
Mexico

HOME PAGE: http://www.bis.org/author/enrique_alberola-ila.htm

Luis Molina

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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