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Costly State Monitoring and Reserve Requirements

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  • Rangan Gupta

    (Department of Economics Pretoria, Rangan Gupta University of Pretoria)

Abstract

The paper explores one rationale behind the existence of financial repression, with the latter being represented through the obligatory ¡°high¡± reserve requirement for the banks. Using an overlapping generations production-economy-monetary model characterized by possibility of banking crisis, we try and answer, whether sizes of reserve requirements are related to probability of crisis. Results indicate that economies with higher probability of banking crisis should optimally choose higher income taxation. The correlation between optimal reserve requirements and probability of crisis is positive only when the social planner has exhausted his ability of income taxation.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 6 (2005)
Issue (Month): 2 (November)
Pages: 263-288

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Handle: RePEc:cuf:journl:y:2005:v:6:i:2:p:263-288

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Keywords: Reserve requirements; Tax evasion; Information asymmetry in financial markets; Costly state verification;

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Cited by:
  1. Rangan Gupta, 2005. "Tax Evasion and Financial Repression," Working papers, University of Connecticut, Department of Economics 2005-34, University of Connecticut, Department of Economics, revised Jun 2007.
  2. Cerqueti, Roy & Coppier, Raffaella, 2011. "Economic growth, corruption and tax evasion," Economic Modelling, Elsevier, Elsevier, vol. 28(1-2), pages 489-500, January.
  3. Manoel Bittencourt & Rangan Gupta & Lardo Stander, 2013. "Tax evasion, financial development and inflation: theory and empirical evidence," Working Papers, University of Pretoria, Department of Economics 201316, University of Pretoria, Department of Economics.
  4. Rangan Gupta & Cobus Vermeulen, 2010. "Private and Public Health Expenditures in an Endogenous Growth Model with Inflation Targeting," Working Papers, University of Pretoria, Department of Economics 201001, University of Pretoria, Department of Economics.

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