Working Paper: NBER ID: w31294
Authors: Stephanie Schmitt-Grohe; MartÃn Uribe
Abstract: About 20 percent of countries have in place dual, multiple, or parallel exchange rates. Exchange controls represent a form of distortionary commercial policy. We show that they can also deflate the real value of external public debt. We study an optimal taxation problem of a government with chronic fiscal deficits and two distortionary instruments, money creation and exchange controls. We calibrate the model to Argentina, which over the past decade has experienced significant exchange controls and persistent fiscal deficits. We show that exchange controls can generate sizable fiscal revenue. However, the optimal level of exchange controls is virtually zero. Financing the fiscal deficit with exchange controls is possible but entails large welfare losses.
Keywords: exchange controls; fiscal policy; Argentina; monetary policy; seignorage
JEL Codes: E5; E63; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange controls (F38) | real value of external public debt (F34) |
| exchange controls (F38) | real exchange rate (F31) |
| real exchange rate (F31) | real value of external public debt (F34) |
| exchange controls (F38) | fiscal revenue (H29) |
| exchange controls (F38) | welfare (I38) |
| seigniorage revenue (H27) | fiscal deficit (H68) |