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The Optimal Structure of Liquidity Provided by a Self-Financed Central Bank

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  • Faig, Miquel

Abstract

Self-financed central banks, without capital and taxes, cannot pay the return on capital to both money and national debt. The gaps between the returns on capital and public securities are implicit taxes, which are shifted forward to commodities that people finance with these securities. Because taxes on investment are less efficient than taxes on consumption, the national debt should earn interest if people use it to finance expenditures that are investment intensive. Also, because money provides short-term liquidity, raising the return on national debt delays expenditure to the future. Hence, paying interest on national debt brings a resource windfall during transitions.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 32 (2000)
Issue (Month): 4 (November)
Pages: 746-65

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Handle: RePEc:mcb:jmoncb:v:32:y:2000:i:4:p:746-65

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Foley, Duncan K & Hellwig, Martin F, 1975. "Asset Management with Trading Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 42(3), pages 327-46, July.
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  11. Bryant, John, 1980. " Nontransferable Interest-Bearing National Debt," Journal of Finance, American Finance Association, vol. 35(4), pages 1027-31, September.
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  13. S. Rao Aiyagari & Mark Gertler, 1990. "Asset Returns with Transactions Cost and Uninsured Risk: A Stage III Exercise," NBER Working Papers 3481, National Bureau of Economic Research, Inc.
  14. Faig, Miquel, 1988. "Characterization of the optimal tax on money when it functions as a medium of exchange," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 137-148, July.
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  18. Bansal, Ravi & Coleman, Wilbur John, II, 1996. "A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1135-71, December.
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Cited by:
  1. Faig, Miquel, 2000. "Money with Idiosyncratic Uninsurable Returns to Capital," Journal of Economic Theory, Elsevier, vol. 94(2), pages 218-240, October.
  2. Miquel Faig & Gregory Gagnon, 2003. "Scarce Collateral and Bank Reserves," Working Papers faig-03-01, University of Toronto, Department of Economics.
  3. Obert Nyawata, 2012. "Treasury Bills and/Or Central Bank Bills for Absorbing Surplus Liquidity," IMF Working Papers 12/40, International Monetary Fund.

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