A graceful return of the drachma

- A small monetary-union country can raise seigniorage by reissuing its own currency.
- Currency reissue yields seigniorage without default on euro obligations.
- Additional seigniorage is available with ongoing national-currency growth.
- The country׳s post-reform equilibrium features dual currencies.

A country participating in a monetary union is constrained by loss of control over seigniorage revenue. Once the government reaches its fiscal limit on ordinary taxation, it cannot turn to seigniorage for financing. We show that a monetary union country can increase its seigniorage revenue by reissuing its own currency even as it fully honors all outstanding debt obligations. We use a simple cash-in-advance model, with domestic currency demand motivated by the need to pay taxes, to show that this policy effectively redistributes seigniorage revenue away from other monetary union members toward the acting country. The magnitude of the seigniorage created by currency reissue is limited both by the relative size of the country and by money demand, and, therefore, by the tax base. If this seigniorage revenue is insufficient, some additional seigniorage is available by allowing the new currency to grow and depreciate over time and domestic real wages to fall.