THE ALLOCATION OF SEIGNIORAGE IN A COMMON CURRENCY AREA

This paper considers the allocation of seigniorage in a common currenc y area with an independent central bank. It is shown that if the centr al bank retains autonomy in the allocation of seigniorage, inflation w ill be suboptimally high and taxes and government spending will be sub optimally low. Constitutionally mandating the rate of money growth wil l result in optimal inflation, but taxes and government spending will be too low. As long as consumers do not put too much weight on public good consumption, relative to private, it is better to constitutionall y mandate seigniorage allocation shares than the level of money growth .