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

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Author Info
Enrique Alberola
Luis Molina

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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.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/00/Fic/dt0006e.pdf
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File Function: First version, 2000
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0006.

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Length: 35 pages
Date of creation: 2000
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Handle: RePEc:bde:wpaper:0006

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Related research
Keywords: EXCHANGE RATE ; INCOME ; FINANCING ; GOVERNMENT;

Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Sikken, Bernd Jan & de Haan, Jakob, 1998. "Budget Deficits, Monetization, and Central-Bank Independence in Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 493-511, July.
  2. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank. [Downloadable!]
    Other versions:
  3. Inci Ötker & Hugh Bredenkamp & A. Javier Hamann & Esteban Jadresic & R. B. Johnston & Paul R. Masson & Barry J. Eichengreen, 1998. "Exit Strategies: Policy Options for Countries Seeking Exchange Rate Flexibility," IMF Occasional Papers 168, International Monetary Fund.
  4. J. Bradford DeLong, 1998. "The budget deficit," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jan 30. [Downloadable!]
  5. Tornell, Aaron & Velasco, Andres, 1998. "Fiscal discipline and the choice of a nominal anchor in stabilization," Journal of International Economics, Elsevier, vol. 46(1), pages 1-30, October. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Guillermo J. Vuletin, 2004. "Exchange Rate Regimes And Fiscal Performance. Do Fixed Exchange Rate Regimes Generate More Discipline Than Flexible Ones?," Econometric Society 2004 North American Winter Meetings 474, Econometric Society. [Downloadable!]
  2. Dalia Grigonyté, 2003. "Impact of Currency Boards on Fiscal Policy in Central and Eastern European Countries," Economic Change and Restructuring, Springer, vol. 36(2), pages 111-133, June. [Downloadable!] (restricted)
  3. Aloy, Marcel & Moreno-Dodson, Blanca & Nancy, Gilles, 2008. "Intertemporal adjustment and fiscal policy under a fixed exchange rate regime," Policy Research Working Paper Series 4607, The World Bank. [Downloadable!]
  4. Carrera, Jorge Eduardo/J.E., 2004. "Hard peg and monetary unions.Main lessons from the Argentine experience," MPRA Paper 7843, University Library of Munich, Germany, revised 2007. [Downloadable!]
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