ABSTRACT
This chapter includes political constraints to explain the use of seigniorage. Economic models of optimal seigniorage are based on a framework in which a "benevolent dictator" chooses the policy that maximizes a social utility function. The chapter argues that there is an introduction of the main political-economic models that analyze seigniorage by considering political incentives and constraints. It suggests that an alternative political-economic approach is developed to explain differences in the use of seigniorage across countries, and discusses how government capacity can play a significant role. The central hypothesis proposed here is straightforward: Weak governments avoid using politically costly economic policies because they fear disrupting the fragile political equilibrium. The chapter examines the empirical implications of the model using econometric panel data analysis. Empirical evidence from a panel of 65 developed and developing countries for the years 1967–1985 supports the predictions of the model.
