Monetary capacity

Working paper

Monetary capacity refers to a state’s capacity to circulate money that is accepted by the public, while fiscal capacity refers to its capacity to tax. We argue that monetary and fiscal capacity, and by extension, markets and states are complements. The long-run European evidence since antiquity shows money stocks and tax revenues moving in close synch. History also offers a natural experiment to estimate the causal effect of monetary capacity on fiscal capacity. The discovery of silver in the New World increased money stocks followed by tax revenues, a finding that is robust to controlling for economic growth.

Authors: Bonfatti, R; Brzezinski, A; Kıvanç Karaman, K; Palma, N

• Publication status: Published
• Publisher: University of Oxford
• Host title: Department of Economics Discussion Paper Series
• Article number: 926
• Series: Department of Economics Discussion Paper Series
• Publication date: 2020-11-12
• ISSN: 1471-0498
• Paper number: 926
• Language: English
• Keywords: monetary capacity; monetization; quantity theory of money; taxation; monetary non-neutrality; fiscal capacity; inflation