A Seigniorage Perspective on the Introduction of a Palestinian Currency
In this paper we found that there are substantial revenues to be gained from the introduction of a Palestinian currency. According to our calculations, it will yield a short-term revenue amounting to more than 22% of the GDP (in the first five years) and around 1.2% annually in the long-run, assuming that the money-multiplier will be equal to 1.5. The revenues will decrease in direct proportion to an increase in the actual money-multiplier. These numbers are based on the assumption that a European inflation rate of 5% per year will prevail. They change considerably with the inflation rate.
In a system without a CUB, the temptation of easy revenue may lead to high inflation and instability in the exchange rate, which will create a bad climate for growth. This is what happened to many new nations, including Israel. The adoption of a CUB will allow the Palestinian entity to collect the seigniorage, while maintaining stability. By our assumptions, since stability is essential to the acceptance of the Palestinian money, the seigniorage will be maximized under this arrangement.