ECON 3580 Lecture Notes - Lecture 24: Seigniorage, Convertibility Plan, Money Supply
17 Jul 2018
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Document Summary
Russia"s financial crisis: after liberalization in 1991, russia"s economic laws were weakly enforced or nonexistent. There was weak enforcement of banking regulations, tax laws, property rights, loan contracts, and bankruptcy laws. Because of a lack of tax revenue, the government financed spending by seigniorage. Inflation rose in 1998 and 1999 but fell thereafter. Currency boards and dollarization: a currency board is a monetary policy where the money supply is entirely backed by foreign currency, and where the central bank is prevented from holding domestic assets. The central bank may not increase the domestic money supply by buying government bonds. This policy restrains inflation and government deficits. The central bank also cannot run out of foreign reserves to support a fixed exchange rate. Argentina enacted a currency board under the 1991 convertibility law: but a currency board can be restrictive (more than a regular fixed exchange rate system).
