BY: STEPHANIE SCHMITT-GROHE
Rutgers University
Department of Economics
MARTIN URIBE
University of Pennsylvania
Department of Economics
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http://papers.ssrn.com/paper.taf?abstract_id=186136
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Contact: STEPHANIE SCHMITT-GROHE
Email: Mailto:grohe at econ.rutgers.edu
Postal: Rutgers University
Department of Economics
75 Hamilton Street
New Brunswick, NJ 08901-1248 USA
Phone: (732)932-2960
Fax: (732)932-7416
Co-Auth: MARTIN URIBE
Email: Mailto:uribe at ssc.upenn.edu
Postal: University of Pennsylvania
Department of Economics
3718 Locust Walk
Philadelphia, PA 19104 USA
ABSTRACT:
When a government decides to dollarize its economy, that is, to
replace the domestic currency with the U.S. dollar, it
automatically ceases to collect the stream of seignorage
revenue, which is instead redirected toward the U.S. government.
A central issue in the debate about dollarization is the
distribution of seignorage between U.S. and the economies that
are considering the adoption of the dollar as the sole legal
tender. A pre-requisite for designing meaningful seignorage
sharing rules is to asses the amount of resources that are at
stake. A common misconception is that the amount of seignorage
income involved is simply equal to the interest income on the
amount of foreign reserves required to exchange the entire
domestic money supply for dollars. This way of measuring the
loss of seignorage income is in general biased for it implicitly
assumes no growth in monetary assets. In this note we show that
this bias can lead to enormous underestimations of the amount of
seignorage revenue lost by governments of countries that
dollarize.
JEL Classification: F41