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Exchange market reform, inflation, and fiscal deficits

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  • Pierre-Richard Agénor
  • Murat Ucer

Abstract

This paper examines the effects of exchange market reform on inflation and quasifiscal deficits in developing countries. The first part presents the conceptual framework, which identifies a variety of implicit taxes and subsidies that must be taken into account (in addition to implicit taxes on exports, as emphasized by Pinto (1991)) in assessing the fiscal and inflationary effects of exchange market reform. A formula that attempts to capture explicitly these taxes and subsidies is derived. The second part applies the formula to six countries (Guyana, India, Jamaica, Kenya, Sierra Leone, and Sri Lanka). The results suggest that exchange market reform may lead to a significant reduction in reliance on the inflation tax.

Suggested Citation

  • Pierre-Richard Agénor & Murat Ucer, 1999. "Exchange market reform, inflation, and fiscal deficits," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 3(1), pages 81-96.
    • Handle: RePEc:taf:jpolrf:v:3:y:1999:i:1:p:81-96
    DOI: 10.1080/13841289908523397
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    Cited by:

    1. Ndung'u, N.S., 1999. "Monetary and Exchange Rate Policy in Kenya," Papers 94, African Economic Research Consortium.
    2. Huizinga, H.P., 1996. "The Taxation Implicit in Two-Tiered Exchange Rate Systems," Other publications TiSEM e01fa769-96e8-4c5e-b9b5-a, Tilburg University, School of Economics and Management.
    3. Ms. Sònia Muñoz, 2007. "Central Bank Quasi-Fiscal Losses and High Inflation in Zimbabwe: A Note," IMF Working Papers 2007/098, International Monetary Fund.
    4. Ndlela, Thandinkosi, 2010. "Implications of real exchange rate misalignment in developing countries: theory, empirical evidence and application to growth performance in Zimbabwe," MPRA Paper 32710, University Library of Munich, Germany.
    5. Zhang, Zhichao, 2001. "Choosing an exchange rate regime during economic transition: The case of China," China Economic Review, Elsevier, vol. 12(2-3), pages 203-226.

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