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Seigniorage, Fiscal Constraints, and the Viability of a Fixed Exchange Rate

Author

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  • Betty C. Daniel

Abstract

Whenever unsustainable current government budget deficits predict future changes in monetary growth through the government's intertemporal budget constraint, fiscal variables become important exchange rate determinants. Failure to understand sustained rates of depreciation, seemingly unjustified by similar differentials in current fundamentals, or the liquidity effect of an open market operation may be due to failure to link future monetary growth to current policy. These ideas are presented using an intertemporal current account theory of the nominal exchange rate. The theory is supported by the mathematical equivalence of intertemporal current account balance and the absence of speculative bubbles in national money markets.

Suggested Citation

  • Betty C. Daniel, 1997. "Seigniorage, Fiscal Constraints, and the Viability of a Fixed Exchange Rate," Discussion Papers 97-05, University at Albany, SUNY, Department of Economics.
    • Handle: RePEc:nya:albaec:97-05
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    More about this item

    Keywords

    Seignoirage; Exchange Rate;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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