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Disinflation against the Environment? An application to the trade-off between seigniorage and deforestation

Authors
Disciplines
  • Ecology
  • Economics
  • Political Science

Abstract

The forest still covers an important share of land area in many developing countries and represents an important source of revenue for governments. Another major contribution to government revenues comes from printing money, namely the seigniorage. Building on a simple theoretical model where governments target inflation and aim at reducing deforestation while minimising a welfare loss function, we exhibit the potential substitution effect between seigniorage and deforestation revenues. Regressions run on a panel of developing countries show that there exists a non-negligible substitution effect between seigniorage and deforestation revenues, which is, as suggested by the theoretical model, even stronger if the endogenous character of seigniorage is taken into account. Adding variables suggested by the theoretical model as well as usual control variables in deforestation equations, do not alter the main result. As a consequence, disinflation policies as recommended by the IMF, may hasten deforestation. The model is extended to address this problem, which shows that international transfers dedicated to rainforest protection may upturn the positive correlation between tighter monetary policies and deforestation and give some additional support to REDD’s advocates.

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