Intertemporal Currency Substitution and Government Deficits

21 Pages Posted: 5 Nov 2006

See all articles by Saziye Gazioglu

Saziye Gazioglu

Robert Gordon University - Aberdeen Business School

W. David McCausland

University of Aberdeen - Business School

Date Written: March 2006

Abstract

This paper highlights the importance of having a strong alternative world currency in order to place a constraint on the ability of a single dominant world currency being able to extract resources from the rest of the world through monetary policy. The effects of monetisation of the budget deficit and the advantages of strong currencies over weaker ones arising from their use as an international store of value are investigated. We find that the long run the budget deficit does not need to be zero. This is because the inflation tax generates resource transfers to the country whose currency is the preferred international store of wealth. Furthermore, the trade balance does not need to be zero, providing there is currency substitution and asymmetry between countries. Thus, the results we obtain are strikingly different from any comparable work in the literature.

Keywords: budget deficits, monetary policy, currency substitution, inflation, exchange rates

JEL Classification: E52, E60, F30

Suggested Citation

Gazioglu, Saziye and McCausland, W. David, Intertemporal Currency Substitution and Government Deficits (March 2006). Available at SSRN: https://ssrn.com/abstract=942274 or http://dx.doi.org/10.2139/ssrn.942274

Saziye Gazioglu

Robert Gordon University - Aberdeen Business School ( email )

Garthdee Road
Aberdeen AB10 7QE
United Kingdom

W. David McCausland (Contact Author)

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Old Aberdeen AB24 3QY, Scotland AB24 3QY
United Kingdom

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