Fiscal Discipline and Exchange Rate Regimes: a Case for Currency Boards?

Enrique Alberola and Luis Molina Sánchez

No 6, Working Papers from Banco de España

Abstract: Empirical evidence shows that fixed exchange rates do not provide more fiscal discipline than flexible regimes, despite the fact that, in priciple, 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 monetary seignoriage is misguiding and that fiscal seignoriage, defined as the actual revenues accruing to government form 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 hypothesis is advanced by observing the empirical link between monetary seignoriage, and their relation with fiscal discipline.

Keywords: exchange rate; income; financing; government (search for similar items in EconPapers)
JEL-codes: E42 E58 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2000
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0006

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