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Seigniorage and Fixed Exchange Rates: An Optimal Inflation Tax Analysis

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  • Stanley Fischer

Abstract

A country that decides to fix its exchange rate thereby gives up control over its own inflation rate and the determination of the revenue received from seigniorage. If the country goes further and uses a foreign money, it loses all seigniorage. This paper uses an optimal inflation tax approach to analyze the consequences for optimal rates of income taxation and welfare of the alternative exchange rate and monetary arrangements. From the viewpoint of seigniorage, a system in which the country is free to determine its own rates of inflation is optimal; fixed exchange rates are second best, and the use of a foreign money is worse. The paper notes that seigniorage is only one of the factors determining the choice of optimal exchange rate regime, but also points out that rates of seigniorage collection are high, typically accounting for five or more percent of government revenue.

Suggested Citation

  • Stanley Fischer, 1981. "Seigniorage and Fixed Exchange Rates: An Optimal Inflation Tax Analysis," NBER Working Papers 0783, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0783
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    Cited by:

    1. Ahmad JafariSamimi & Habib Ansari Samani & Younes Nademi, 2011. "Inflation and Inflation Tax in Iran: A Threshold Regression ‘Laffer Curve’ Model," Journal of Economics and Behavioral Studies, AMH International, vol. 3(3), pages 163-168.
    2. Fernando Ossa, 1988. "El Sistema Monetario Internacional en los Últimos Veinticinco Años," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 25(76), pages 405-430.
    3. Rigobon, Roberto, 2002. "Disinflation and fiscal reform: a neoclassical perspective," Journal of International Economics, Elsevier, vol. 58(2), pages 265-297, December.
    4. Petr Mach & Tomáš Hanzák, 2004. "Ražebné ve spojitém čase [Seigniorage in continuous time]," Politická ekonomie, Prague University of Economics and Business, vol. 2004(4), pages 531-536.
    5. Zou, Heng-Fu, 1993. "Dollarization and inflation in a two-country optimization model," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 209-220, April.

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