Working Paper: CEPR ID: DP631
Authors: Gabriel De Kock; Vittorio Grilli
Abstract: A common argument against either a monetary union or a regime of fixed exchange rates is that they preclude flexible use of the inflation tax. We address this point of view by comparing three alternative exchange rate regimes: a pure float, an EMS regime in which the exchange rate is fixed but can be realigned, and a monetary union. We model the three regimes as alternative commitments on future seigniorage policies. The approach suggests that it is not possible to Pareto-rank the three regimes. On the other hand, we provide intuitive conditions under which each of the systems is superior to the others.
Keywords: exchange rate; seigniorage; fiscal policy
JEL Codes: F33; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate regime (F33) | fiscal policy flexibility (E62) |
| monetary union (F36) | inflation tax (E31) |
| pure float (F31) | inflation choices flexibility (E31) |
| adjustable peg regime (F33) | fiscal policy flexibility (E62) |
| monetary union superior to free float and adjustable peg (F36) | fiscal outcomes (H68) |