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Central bank responsibility, seigniorage, and welfare

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  • Joseph H. Haslag
  • Joydeep Bhattacharya

Abstract

Historically, countries have relied on seigniorage. In this paper, we explore a set of features in which a benevolent government will rely on seigniorage. We use a simple overlapping generations model with return-dominated money. Money is valued because of a reserve requirement. The government has to raise a fixed amount of revenue solely for the purposes of making transfers to the old. It has two revenue-generating options: lump-sum taxes (money creation) under the control of the treasury (central bank). We restrict the amount of seigniorage collected to be nonnegative and require that the government's budget constraint be satisfied on a per-period basis. Our question is, Can we find stationary monetary competitive equilibria that are welfare maxima, given that the money stock cannot contract? Computational experiments reveal, somewhat surprisingly, that the answer is yes. Indeed, in our setup, benevolent governments may require that at least part, if not all, of the revenue be raised via money creation.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 9909.

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Date of creation: 1999
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Handle: RePEc:fip:feddwp:99-09

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Keywords: Banking structure ; Banks and banking; Foreign;

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  1. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March.
  2. Freeman, Scott, 1993. "Resolving Differences over the Optimal Quantity of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 801-11, November.
  3. Rao Aiyagari, S. & Gertler, Mark, 1985. "The backing of government bonds and monetarism," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 19-44, July.
  4. Joseph H. Haslag & Eric R. Young, 1998. "Revenue-maximizing monetary policy," Working Papers 9801, Federal Reserve Bank of Dallas.
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