Open Economies Review

, Volume 7, Issue 3, pp 257-273

Reserve requirements, currency substitution, and seigniorage in the transition to European monetary union

  • Joseph P. DanielsAffiliated withCollege of Business Administration, Marquette University
  • , David D. van HooseAffiliated withCollege of Commerce and Business Administration, University of Alabama

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This article considers a transition toward European monetary union that combines increased substitution of currencies and greater monetary, financial, and fiscal policy coordination. It explores how such a transition would affect national inflation and interest rates and required reserve ratios when governments depend in part on seigniorage funding for public expenditures. We find that greater coordination of policies would lead to lower inflation and interest rates but higher reserve-requirement ratios. Because higher reserve-requirement ratios could place European banks at a competititve disadvantage, we conclude that the interaction between reserve requirements and seigniorage concerns makes it less likely that the gradualist approach of the Maastricht treaty is a sustainable means of transition to European union.

Key words

European Union reserve requirements currency substitution

JEL Classification

F36 F42