A graceful return of the drachma

Betty Daniel ()

European Economic Review, 2014, vol. 71, issue C, 228-243

Abstract: A country participating in a monetary union is constrained by loss of control over seigniorage revenue. Once the government reaches its fiscal limit on ordinary taxation, it cannot turn to seigniorage for financing. We show that a monetary union country can increase its seigniorage revenue by reissuing its own currency even as it fully honors all outstanding debt obligations. We use a simple cash-in-advance model, with domestic currency demand motivated by the need to pay taxes, to show that this policy effectively redistributes seigniorage revenue away from other monetary union members toward the acting country. The magnitude of the seigniorage created by currency reissue is limited both by the relative size of the country and by money demand, and, therefore, by the tax base. If this seigniorage revenue is insufficient, some additional seigniorage is available by allowing the new currency to grow and depreciate over time and domestic real wages to fall.

Keywords: F41; F42; Monetary union; Seigniorage; Dual currency; Fiscal limits (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292114001238
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:71:y:2014:i:c:p:228-243

DOI: 10.1016/j.euroecorev.2014.08.004

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().