Seigniorage in small-open dollarized economies. The Argentine case

Montevideo

Congreso; Arnoldshain Seminar XVIII; 2024

Universidad de la República. Uruguay

In this paper, we perform a cash-in-advance model in a bimonetary economy due to there is no confidence in the value of the domestic currency. It is assumed that the government finances its fiscal deficit by seigniorage and external debt. In the latter case, individuals demand in advance the dollars the government obtains through its indebtedness, saving in dollars at time t to finance their transactions at t+1. We assume that individuals require domestic currency just at the time they purchase non-tradables goods. We find a Bailey curve where hoarding of foreign currency decreases the possibilities of government financing through seigniorage. Evaluating the theoretical predictions, we find that the fiscal deficit is mainly explained by the money supply, and that the increase in the latter prevents the government from taking on debt to supply dollars to individuals. The higher the rate of accumulation of foreign currency by individuals the lower the growth rate of the money supply (and the lower the rate of inflation). The rate of accumulation of foreign currency is also related to a reduction in the financing of the fiscal deficit through theseigniorage. A strong long-term relationship between foreign debt and foreign currency hoarding is observed, suggesting that individuals take advantage of debt cycles by demanding foreign currency to hedge against inflation and purchase goods.