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Interest on Cash with Endogenous Fiscal Policy

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  • Alexei Deviatov

    ()
    (New Economic School of Moscow)

  • Neil Wallace

    ()
    (Penn State Department of Economics)

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    Abstract

    Monetary policy and the welfare cost of inflation cannot be studied without some specification of allowable fiscal instruments. Here, feasible policies are implied by the frictions imposed to get roles for money and credit. The model has extreme versions of an above-ground economy and a benign underground economy. The former consists of people who are perfectly monitored and who, therefore, can be taxed; while the latter consists of people who are anonymous and, who, therefore, cannot be taxed. For various examples, ex ante (representative-agent) optima are computed. For most examples for the outside-money version of the model, it is not optimal to use taxes to raise the return on money held by anonymous people.

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    File URL: http://bfi.uchicago.edu/RePEc/bfi/wpaper/BFI_2010-012.pdf
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    Bibliographic Info

    Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2010-012.

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    Date of creation: Nov 2010
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    Handle: RePEc:bfi:wpaper:2010-012

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    Related research

    Keywords: interest on cash; inside-money; outside-money; matching; monitoring; mechanism-design;

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    References

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    1. Rao Aiyagari, S. & Wallace, Neil & Wright, Randall, 1996. "Coexistence of money and interest-bearing securities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 397-419, June.
    2. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
    3. Wright, Randall, 1999. "Comment on Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 461-68, August.
    4. Edward J. Green & Ruilin Zhou, 2002. "Money as a mechanism in a Bewley economy," Working Paper Series WP-02-15, Federal Reserve Bank of Chicago.
    5. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal Fiscal and Monetary Policy: Equivalence Results," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 141-170, 02.
    6. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    7. Nicolini, Juan Pablo, 1998. "Tax evasion and the optimal inflation tax," Journal of Development Economics, Elsevier, vol. 55(1), pages 215-232, February.
    8. Ostroy, Joseph M, 1973. "The Informational Efficiency of Monetary Exchange," American Economic Review, American Economic Association, vol. 63(4), pages 597-610, September.
    9. Craig, Ben, 1999. "Comment on Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 458-60, August.
    10. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
    11. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 865-88, October.
    12. Wallace, Neil, 2010. "The Mechanism-Design Approach to Monetary Theory," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 1, pages 3-23 Elsevier.
    13. Koreshkova, Tatyana A., 2006. "A quantitative analysis of inflation as a tax on the underground economy," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 773-796, May.
    14. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
    15. Sargent, Thomas J & Smith, Bruce D, 1987. "Irrelevance of Open Market Operations in Some Economies with Government Currency Being Dominated in Rate of Return," American Economic Review, American Economic Association, vol. 77(1), pages 78-92, March.
    16. Alexei Deviatov, 2004. "Money creation in a random matching model," Money Macro and Finance (MMF) Research Group Conference 2003 24, Money Macro and Finance Research Group.
    17. Camera, Gabriele, 2001. "Dirty money," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 377-415, April.
    18. Cavalcanti, Ricardo de O & Wallace, Neil, 1999. "Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 443-57, August.
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