DP631 | Fiscal Policies and the Choice of Exchange Rate Regime

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Publication Date

28/03/1992

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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.