DP631 Fiscal Policies and the Choice of Exchange Rate Regime

Author(s):	Vittorio Grilli
Publication Date:	March 1992
Keyword(s):	Exchange Rate, Fiscal Policy, Seignorage
JEL(s):	F33, F36
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=631

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.