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We develop a novel and tractable test of the degree of fiscal dominance characterizing the relationship between a country's fiscal and monetary authorities. The government's long-run fiscal rule stipulates that a given fraction of the outstanding public debt is backed by the present discounted value of current and future primary surpluses, and the remainder is backed by seigniorage revenue. The larger the proportion of debt backed by seigniorage revenue, the stronger the degree of fiscal dominance. We use our test to construct an index of fiscal dominance for 24 OECD countries. Our estimates of fiscal dominance correlate with some institutional measures of central bank independence, such that a high degree of fiscal dominance corresponds to weaker central bank independence.
