MAXIMIZING SEIGNORAGE REVENUE DURING TEMPORARY SUSPENSIONS OF CONVERTIBILITY - A NOTE

This note extends the theory of the revenue maximizing rate of montary growth to the case of a temporary suspension of convertibility. It al so suggests a methodology for the interpretation of monetary behaviour during historical periods of inconvertibility. First we analyze the c ase of a government with a monopoly over currency issue. The governmen t maximizes seignorage revenue by generating an inflation, but the ter minal condition of a return to convertibility implies that the price l evel must drop at the point of suspension of convertibility, so that t here is no discontinuity at the data of resumption. We then consider t he behaviour of a private banking system whose monetary liabilities ar e temporarily inconvertible.