Seigniorage, Inflation and Dollarization

Paper Summary:

This paper briefly explains the concept of seigniorage and outlines the reasons why seigniorage is considered a valuable taxing tool by governments around the world. The paper focuses on Columbia and why Columbia is unable to capitalize fully on the benefits of seigniorage because of the U.S. dollar's impact on the economy in that country.

Table of Contents:
Seigniorage (And Inflation) Explained
Dollarization
Colombia and Seigniorage
Conclusion

From the Paper:

"Another reason these factors have negatively impacted upon Colombia's ability to profit from Seigniorage is that the peso has not always been the preferred currency among consumers. Because of the difficulties in the Colombian government and economy, and the fact that many U.S. dollars are available as alternate currency, many consumers have favored the dollar over the peso. This has resulted in people utilizing the dollar as a first alternative and the peso as a second in many cases. At a minimum, it has resulted in consumers using dollars as a parallel alternate, thereby "cutting the profits" that the government would make if the peso were the only currency. In effect the Colombian government has lost its monopoly in creating currency."

Sample of Sources Used:

• Aisen, A., and Veiga, F. (2005). The political economy of seigniorage. IMF Working Paper. Retrieved 25 November 2006 from http://www.imf.org/external/pubs/ft/wp/2005/wp05175.pdf.
• Andolfatto, D. (2006). Macroeconomic theory and policy. Department of Economics, Simon Fraser University. Manuscript. Retrieved 25 November 2006 at http://www.sfu.ca/ dandolfa/macro2006.pdf.
• Congressional Budget Office. (2005). Cost estimate. Retrieved 26 November 2006 from http://www.cbo.gov/ftpdocs/62xx/doc6271/hr902.pdfpage5.
• Maroney, T. (n.d.) Backgrounder: Dollarization. Initiative for Policy Dialogue. Retrieved 26 November 2006 from http://72.14.209.104/search?q=cache:3c55ZPQagPUJ:www.gsb.columbia.edu/ipd/j_dollarization_bk.html+columbia+currency+dollar+Seigniorage&hl=en&gl=us&ct=clnk&cd=3.

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