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Optimal reserve requirements, deposit taxation, and the demand for money

Authors
Journal
Journal of Monetary Economics
0304-3932
Publisher
Elsevier
Publication Date
Volume
30
Issue
1
Identifiers
DOI: 10.1016/0304-3932(92)90048-7
Disciplines
  • Economics

Abstract

Abstract We study welfare and equivalence relationships between two schemes for financing a recurrent real expenditure: reserve-requirement-augmented seigniorage (RRS) and seigniorage deposit tax combinations (SD). The model we employ includes overlapping generations, fiat currency, and a risky physical asset. Its implications depend critically on whether it is specified so as to be ‘diversifying’ - so that fiat currency has value when the expenditure is financed via optimal taxation of asset returns. If the specification is diversifying, RRS is broadly equivalent to SD, and an interior reserve ratio can be part of an optimal financing scheme. If it is not, the best RRS scheme involves an extreme reserve ratio, produces a hyperinflation, and is Pareto-dominated by a pure deposit tax scheme.

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