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Government Finance and the Demand for Money—The Relation between Taxation and the Acceptability of Fiat Money

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  • Mack Ott
  • John A. Tatom

Abstract

Requiring taxes to be paid in domestic money provides a valuable characteristic for a state’s money. In the case of a state’s fiat money, it is the foundation for money demand and hence to the development of a financial system built around state money. Except for relatively highly taxed countries, where taxes may encourage tax avoidance and holding bank deposits, the level of taxation is a positive factor boosting financial development. Granger causality tests for 65 countries over the past half-century test the relationship between money and government finance. Except for the low-income countries, where there are only five with adequate data, the causal relationship between taxation and money demand is generally supported in the 60 countries making up the three higher income groups.
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  • Mack Ott & John A. Tatom, 2016. "Government Finance and the Demand for Money—The Relation between Taxation and the Acceptability of Fiat Money," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(1), pages 53-77, February.
    • Handle: RePEc:bla:ecnote:v:45:y:2016:i:1:p:53-77
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    File URL: http://hdl.handle.net/10.1111/ecno.12048
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    Cited by:

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    2. Narayan Sethi & Saileja Mohanty & Sanhita Sucharita & Nanthakumar Loganathan, 2020. "Tax Reform And Economic Growth Nexus In India: Evidence From The Cointegration And Rolling-Window Causality," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(06), pages 1699-1725, December.

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    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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