International capital markets and central bank sovereignty

We derive the inflation elasticity of the demand for domestic currency using a shopping time model. The resulting transactions cost function is solidly grounded in a theory of the transactions process. The implied production function for monetary services cannot have a constant elasticity of substitution. Application of these results to currency substitution implies that an open country that raises revenue via inflation seigniorage must reduce its inflation rate to the inflation rate of a dominant currency and that there exists a monetary reform that will result in maximum seigniorage at the inflation rate of that dominant currency. (JEL: E 41, E 42, E 58, F 33).

International capital markets and central bank sovereignty Academic Article