Discussion paper

DP631 Fiscal Policies and the Choice of Exchange Rate Regime

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.


Grilli, V (1992), ‘DP631 Fiscal Policies and the Choice of Exchange Rate Regime‘, CEPR Discussion Paper No. 631. CEPR Press, Paris & London. https://cepr.org/publications/dp631