Constitutional Political Economy

, Volume 16, Issue 1, pp 71–83 | Cite as

Credible Currency: A Constitutional Perspective

  • George Selgin
  • Lawrence H. White
Article

Abstract

By contrast to private banks, public monetary authorities – central banks and currency boards – have limited credibility in making redemption or fixed-exchange-rate commitments. Their sovereign immunity obviates legal penalties for devaluing, and their monopoly status weakens reputational penalties. The softness of central bank promises invites speculative attack and currency crises. Privatization and decentralization of exchange-rate commitments provides a more credible currency by making redemption commitments legally enforceable and reputable. This contrast sheds light on (1) the breakdown of the classical gold standard and (2) the costs and benefits of dollarization.

Keywords

currency credibility monetary constitution 

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Copyright information

© Springer Science+Business Media, Inc. 2005

Authors and Affiliations

  • George Selgin
    • 1
  • Lawrence H. White
    • 2
  1. 1.Department of EconomicsUniversity of GeorgiaUSA
  2. 2.Department of EconomicsUniversity of Missouri -- St. LouisUSA

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