Exchange Controls As A Fiscal Instrument

Stephanie Schmitt-Grohe and Martín Uribe

No 31294, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: About 20 percent of countries employ multiple exchange rates. An important rationale for this practice is the creation of fiscal revenue. This paper develops a general equilibrium model with exchange controls. It shows that such controls can mobilize significant fiscal resources, but also cause dollar shortages, misallocation, and smuggling. The paper studies an optimal taxation problem where chronic fiscal deficits must be financed with money creation and exchange controls. Under plausible calibrations, the optimal policy favors multiple exchange rates, with stronger controls on exports than on imports. Both exchange controls and inflation finance significant portions of the deficit.

JEL-codes: E5 E63 F41 (search for similar items in EconPapers)
Date: 2023-06
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