Monetary capacity
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 show...
| Main Authors: | , , , |
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| Format: | Working paper |
| Language: | English |
| Published: |
University of Oxford
2020
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| Summary: | 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.
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