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

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  • Adenutsi, Deodat E.

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37134.

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Date of creation: 06 Sep 2007
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Publication status: Published in West African Journal of Monetary and Economic Integration 1.8(2008): pp. 91-129
Handle: RePEc:pra:mprapa:37134

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Keywords: Dollarisation; Inflation Tax; Openness; Seigniorage; Ghana;

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References

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  1. Edgar L. Feige & Vedran Šošiæ & Michael Faulend & Velimir Šonje, 2002. "Unofficial Dollarization in Latin America: Currency Substitution, Network Externalities and Irreversibility," International Finance, EconWPA 0205002, EconWPA.
  2. Manfred J. M. Neumann, 1996. "A Comparative Study of Seigniorage: Japan and Germany," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 14(1), pages 104-142, July.
  3. Levent, Korap, 2006. "Seigniorage revenue and Turkish economy," MPRA Paper 20106, University Library of Munich, Germany.
  4. Jefferson, Philip N., 1998. "Seigniorage payments for use of the dollar: 1977-1995," Economics Letters, Elsevier, Elsevier, vol. 58(2), pages 225-230, February.
  5. Hochreiter, Eduard & Rovelli, Riccardo & Winckler, Georg, 1996. "Central banks and seigniorage: A study of three economies in transition," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 629-643, April.
  6. Pablo E. Guidotti & Carlos A. Rodriguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 518-544, September.
  7. Gomis-Porqueras, Pere & Serrano, Carlos & Somuano, Alejandro, 2000. "Currency substitution in Latin America - lessons from the 1990s," Policy Research Working Paper Series 2340, The World Bank.
  8. McKinnon, Ronald I, 1982. "Currency Substitution and Instability in the World Dollar Standard," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 320-33, June.
  9. Adenutsi, Deodat E. & Yartey, Charles A., 2007. "Financial sector development and the macrodynamics of ‘de facto’ dollarisation in developing countries: the case of Ghana," MPRA Paper 29333, University Library of Munich, Germany.
  10. Miles, Marc A, 1978. "Currency Substitution, Flexible Exchange Rates, and Monetary Independence," American Economic Review, American Economic Association, American Economic Association, vol. 68(3), pages 428-36, June.
  11. Liliana Rojas-Suárez, 1992. "Currency Substitution and Inflation in Peru," IMF Working Papers 92/33, International Monetary Fund.
  12. Phylaktis, Kate & Taylor, Mark P, 1993. "Money Demand, the Cagan Model and the Inflation Tax: Some Latin American Evidence," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 32-37, February.
  13. Kiguel, Miguel A. & Neumeyer, Pablo Andres, 1989. "Inflation and seigniorage in Argentina," Policy Research Working Paper Series 289, The World Bank.
  14. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(2), pages 295-313, April.
  15. Cuddington, John T. & Cuddington, John T., 1983. "Currency substitution, capital mobility and money demand," Journal of International Money and Finance, Elsevier, Elsevier, vol. 2(2), pages 111-133, August.
  16. Kiguel, Miguel A & Neumeyer, Pablo Andres, 1995. "Seigniorage and Inflation: The Case of Argentina," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(3), pages 672-82, August.
  17. Friedman, Milton, 1971. "Government Revenue from Inflation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 79(4), pages 846-56, July-Aug..
  18. Klein,Martin & Neumann,Manfred, . "Seignorage: What is it and who gets it?," Discussion Paper Serie B, University of Bonn, Germany 124, University of Bonn, Germany.
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