Seigniorage in a neoclassical economy: some computational results
AbstractIn this paper, we consider a government that executes a permanent open market sale. The government is forced to eventually use money creation to pay for the debt's expenses, choosing between changing either the money growth rate (the inflation-tax rate) or the reserve requirement ratio (the inflation-tax base). We first derive conditions under which each of the two second-best alternative policies are feasible in an economy with neoclassical production. Armed with these conditions, we ask the following question: Which monetary policy action is better in a welfare sense? With neoclassical production, monetary policy potentially has long-run effects on the capital stock and the marginal product of capital. The curvature of the production function is crucial. The computational experiments show, somewhat surprisingly, that a permanent increase in government bonds is financed by either lower reserve requirements or faster money growth. Accordingly, steady-state welfare for all generations is higher under the reserve-requirement policy.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 9901.
Date of creation: 1999
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-11-28 (All new papers)
- NEP-CMP-2000-02-03 (Computational Economics)
- NEP-DGE-1999-11-28 (Dynamic General Equilibrium)
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