The policy dilemma of economic openness and seigniorage-maximizing inflation in dollarised developing countries: The Ghanaian experience

Deodat Adenutsi

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper a comprehensive framework for measuring total gross seigniorage as suggested by Neumann was employed to analyze the implications of economic openness and inflation in dollarised developing countries with special reference to Ghana within the context of an extended Cagan model. Using quarterly data, the paper examined the relationship between inflation and seigniorage for the 1996-2005 period and shows how analogous this relationship is to the popular Laffer curve comprising seigniorage generation and inflation rates for Ghana. The main findings of this study are that, in Ghana, economic openness Granger-causes inflation and dollarisation whilst seigniorage-maximizing rate of inflation varies from 102% in the short-run to 74% in the long-run. On the average, foreign currencies constitute more than one-third of the total monetary aggregates in developing countries which is a testimony of high levels of dollarisation making the effectiveness of monetary policies below par. Based on the empirical results, the paper recommends that in dollarised developing countries such as Ghana, the appropriate policy option to deepen the financial sector should not be that which focuses on arbitrary opening of the economy which has the potential of promoting dollarisation of the economy causing inflation and making monetary policy implementation ineffective. Furthermore, considering the high inflation threshold for seigniorage maximization, it would be prudent for Ghana to find an alternative source of budget finance that is non-inflationary in the long-run.

Keywords: Dollarisation; Inflation Tax; Openness; Seigniorage; Ghana (search for similar items in EconPapers)
JEL-codes: E31 F13 H27 (search for similar items in EconPapers)
Date: 2007-09-06
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Published in West African Journal of Monetary and Economic Integration 1.8(2008): pp. 91-129

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