Fiscal Dominance, Monetary Policy and Exchange Rates: Lessons from Early-Modern Venice

Abstract

The impact of fiscal dominance on exchange rates has been relatively overlooked by the literature. We focus on an early unique experiment of freely floating State-issued money, implemented in Venice from 1619 to 1666. Building on a new hand-collected database from a previously unused archival source, we show that despite the Venetian government’s reputation for fiscal prudence, the external value of the ducat was highly sensitive, and increasingly so, to episodes of automatic government deficit monetization through the Banco del Giro during the shocks of 1630 (outbreak of the bubonic plague) and 1648-50 (escalation of the Cretan War).

Keywords: Fiscal dominance, Exchange rates, Venice

JEL Classification: F31, E63, N33, N43