IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/141134.html

The fiscal implications of parallel currencies

Author

Listed:
  • Bahaj, Saleem
  • Reis, Ricardo

Abstract

By controlling the scarcity of an offshore parallel currency, policymakers can manage capital flows and steer the exchange rate. This is an alternative policy to setting the rate of a Tobin tax. However, its fiscal implications are distinct, and this paper lays them out. Having a parallel currency creates both seigniorage and liquidity revenues. The two revenues have different sizes and different Laffer curves, both of which vary with the regime for the exchange rate, with liquidity policies, and with the size of the offshore market. Quantitatively, the fiscal footprint of offshore money management is small and the Laffer curve is flat, boosting the chances that it can be used independently of fiscal pressures.

Suggested Citation

  • Bahaj, Saleem & Reis, Ricardo, 2026. "The fiscal implications of parallel currencies," LSE Research Online Documents on Economics 141134, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:141134
    as

    Download full text from publisher

    File URL: https://researchonline.lse.ac.uk/id/eprint/141134/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Timothy J. Kehoe & Juan Pablo Nicolini (ed.), 2022. "A Monetary and Fiscal History of Latin America, 1960-2017," Books, University of Minnesota Press, number 1.
    2. Timothy J. Kehoe & Juan Pablo Nicolini & Thomas Sargent, 2022. "A Framework for Studying the Monetary and Fiscal History of Latin America," Book Chapters, in: Timothy J. Kehoe & Juan Pablo Nicolini (ed.), A Monetary and Fiscal History of Latin America, 1960-2017, pages 19-42, University of Minnesota Press.
    3. Reis, Ricardo, 2026. "Financial repression in the XXIst century," LSE Research Online Documents on Economics 138502, London School of Economics and Political Science, LSE Library.
    4. Chamon, Marcos & Garcia, Márcio, 2016. "Capital controls in Brazil: Effective?," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 163-187.
    5. Carlos Esquivel & Timothy J. Kehoe & Juan Pablo Nicolini, 2022. "Lessons from the Monetary and Fiscal History of Latin America," Book Chapters, in: Timothy J. Kehoe & Juan Pablo Nicolini (ed.), A Monetary and Fiscal History of Latin America, 1960-2017, pages 537-565, University of Minnesota Press.
    6. Benati, Luca & Lucas, Robert E. & Nicolini, Juan Pablo & Weber, Warren, 2021. "International evidence on long-run money demand," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 43-63.
    7. Fratzscher, Marcel & Gloede, Oliver & Menkhoff, Lukas & Sarno, Lucio & Stöhr, Tobias, 2019. "When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 0(1), pages 132-156.
    8. Reis, Ricardo, 2026. "Financial Repression in the XXIst Century," CEPR Discussion Papers 21072, Centre for Economic Policy Research.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fernández-Villaverde, Jesús & Ventura, Gustavo & Yao, Wen, 2025. "The wealth of working nations," European Economic Review, Elsevier, vol. 173(C).
    2. Gabriel Palazzo & Martin Rapetti & Joaquin Waldman, 2025. "Stabilization programs in chronic-inflation countries: evidence from Latin America," Oxford Development Studies, Taylor & Francis Journals, vol. 53(4), pages 407-441, October.
    3. Lucas Ordóñez, 2025. "The Transmission of Supply Shocks to Inflation: the Case of Argentina (2004-2022)," Working Papers 351, Red Nacional de Investigadores en Economía (RedNIE).
    4. Reis, Ricardo, 2026. "Financial repression in the XXIst century," LSE Research Online Documents on Economics 138502, London School of Economics and Political Science, LSE Library.
    5. Kathryn M. E. Dominguez, 2020. "Revisiting Exchange Rate Rules," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(3), pages 693-719, September.
    6. Kathryn M. E. Dominguez, 0. "Revisiting Exchange Rate Rules," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 0, pages 1-27.
    7. Sandri, Damiano, 2023. "FX intervention to stabilize or manipulate the exchange rate? Inference from profitability," Journal of International Money and Finance, Elsevier, vol. 131(C).
    8. Hernández, Juan R., 2025. "Covered interest parity: A forecasting approach to estimate the neutral band," Economic Modelling, Elsevier, vol. 148(C).
    9. Thanh C. Nguyen & Vítor Castro & Justine Wood, 2022. "Political environment and financial crises," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 417-438, January.
    10. Lukas Boer, 2019. "Measuring the Effect of Foreign Exchange Intervention Policies on Exchange Rates," DIW Roundup: Politik im Fokus 128, DIW Berlin, German Institute for Economic Research.
    11. Cezar, Rafael & Monnet, Eric, 2023. "Capital controls and foreign reserves against external shocks: Combined or alone?," Journal of International Money and Finance, Elsevier, vol. 137(C).
    12. Alain Naef, 2021. "Dirty float or clean intervention? The Bank of England in the foreign exchange market," European Review of Economic History, European Historical Economics Society, vol. 25(1), pages 180-201.
    13. Nie, Owen, 2022. "The information content of capital controls," Journal of International Money and Finance, Elsevier, vol. 127(C).
    14. Boucekkine, R. & Laksaci, M. & Touati-Tliba, M., 2021. "Long-run stability of money demand and monetary policy: The case of Algeria," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    15. Claudiu Tiberiu ALBULESCU & Dominique Pepin, 2018. "Monetary Integration, Money-Demand Stability, and the Role of Monetary Overhang in Forecasting Inflation in CEE Countries," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 33(4), pages 841-879.
    16. Idil Uz Akdogan, 2020. "Understanding the dynamics of foreign reserve management: The central bank intervention policy and the exchange rate fundamentals," International Economics, CEPII research center, issue 161, pages 41-55.
    17. Anjaly B. & Malabika Deo, 2025. "A study of the effectiveness of central bank intervention in BRICS countries," International Economics and Economic Policy, Springer, vol. 22(1), pages 1-25, February.
    18. Lovchikova, Marina & Matschke, Johannes, 2024. "Capital controls and the global financial cycle," European Economic Review, Elsevier, vol. 163(C).
    19. Bazot, Guillaume & Monnet, Eric & Morys, Matthias, 2019. "Taming the gobal financial cycle: Central banks and the sterilization of capital flows in the first era of globalization," IBF Paper Series 03-19, IBF – Institut für Bank- und Finanzgeschichte / Institute for Banking and Financial History, Frankfurt am Main.
    20. Nicolas E. Magud & Carmen M. Reinhart & Kenneth S. Rogoff, 2018. "Capital Controls: Myth and Reality--A Portfolio Balance Approach," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 1-47, May.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:141134. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.