The fiscal implications of parallel currencies

Saleem Bahaj and Ricardo Reis

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: By controlling the scarcity of an offshore parallel currency, policymakers can manage capital flows and steer the exchange rate. This is an alternative policy to setting the rate of a Tobin tax. However, its fiscal implications are distinct, and this paper lays them out. Having a parallel currency creates both seigniorage and liquidity revenues. The two revenues have different sizes and different Laffer curves, both of which vary with the regime for the exchange rate, with liquidity policies, and with the size of the offshore market. Quantitatively, the fiscal footprint of offshore money management is small and the Laffer curve is flat, boosting the chances that it can be used independently of fiscal pressures.

Keywords: integrated policy framework; CNH; financial transaction taxes; fiscal-monetary interactions (search for similar items in EconPapers)
JEL-codes: E51 F31 F33 (search for similar items in EconPapers)
Date: 2026-09-30
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Published in Journal of Macroeconomics, 30, September, 2026, 90, pp. 103783. ISSN: 0164-0704

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