Liberalisation and seigniorage revenue in Kenya, Ghana and Tanzania

This article examines the implications for seigniorage revenue of exchange rate and asset market liberalisation. It is argued that liberalisation lowers the average and marginal seigniorage capacity of governments by increasing the elasticity of substitution between base money and other financial assets. Moreover to the extent that exchange rate liberalisation eliminates goads market rationing, it simultaneously reduces the return to holding precautionary and speculative money balances. The implication is that countries that have relied on seigniorage revenue need to undertake deeper-than-anticipated fiscal adjustment in order to maintain macroeconomic balance following liberalisation programmes. The article uses error-correction estimates of the demand for base money to derive the long-run revenue maximising rate of inflation for the three economies and to assess the revenue implications of the sluggish adjustment of money demand in response to short-term monetary shocks.