Seigniorage, Fiscal Constraints, and the Viability of a Fixed Exchange Rate

Betty C. Daniel ()

Discussion Papers from University at Albany, SUNY, Department of Economics

Abstract: Whenever unsustainable current government budget deficits predict future changes in monetary growth through the government's intertemporal budget constraint, fiscal variables become important exchange rate determinants. Failure to understand sustained rates of depreciation, seemingly unjustified by similar differentials in current fundamentals, or the liquidity effect of an open market operation may be due to failure to link future monetary growth to current policy. These ideas are presented using an intertemporal current account theory of the nominal exchange rate. The theory is supported by the mathematical equivalence of intertemporal current account balance and the absence of speculative bubbles in national money markets.

Keywords: Seignoirage; Exchange Rate (search for similar items in EconPapers)
JEL-codes: F30 F31 (search for similar items in EconPapers)
Date: 1997

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