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The Economic Effects of Inflation Tax Instruments in an Overlapping-Generations Economy with Production

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  • Jianhuai Shi

    () (China Center for Economic Research (CCER), Peking University)

Abstract

Most inflation tax literature considers currency as the entire monetary base. In reality, however, many countries impose inflation tax on the required reserves of the banking system as well as on currency. Developing countries in particular usually augment the currency component of the monetary base by imposing high reserve requirements on bank deposits. This paper incorporates financial intermediaries into a general equilibrium setting in order to analyze the reserve component of the inflation tax. We present a Diamond-type overlapping-generations model in the context of a developing open economy, and analyze the economic consequences of changes in the reserve requirement and the rate of inflation. The model displays some results that are different from those of the existing literature.

Suggested Citation

  • Jianhuai Shi, 2002. "The Economic Effects of Inflation Tax Instruments in an Overlapping-Generations Economy with Production," Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 433-451, November.
  • Handle: RePEc:cuf:journl:y:2002:v:3:i:2:p:433-451
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    References listed on IDEAS

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    1. Romer, David, 1985. "Financial intermediation, reserve requirements, and inside money: A general equilibrium analysis," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 175-194, September.
    2. Galor, Oded & Ryder, Harl E., 1989. "Existence, uniqueness, and stability of equilibrium in an overlapping-generations model with productive capital," Journal of Economic Theory, Elsevier, vol. 49(2), pages 360-375, December.
    3. Abel, Andrew B., 1987. "Optimal monetary growth," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 437-450, May.
    4. Baltensperger, Ernst & Jordan, Thomas J., 1997. "Seigniorage, banking, and the optimal quantity of money," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 781-796, June.
    5. Huybens, Elisabeth & Smith, Bruce D., 1998. "Financial Market Frictions, Monetary Policy, and Capital Accumulation in a Small Open Economy," Journal of Economic Theory, Elsevier, vol. 81(2), pages 353-400, August.
    6. Brock, Philip L., 1984. "Inflationary finance in an open economy," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 37-53, July.
    7. Bencivenga, Valerie R & Smith, Bruce D, 1992. "Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 767-790, October.
    8. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-576, April.
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    10. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
    11. Davis, George & Toma, Mark, 1995. "Inflation, reserve requirements, and real interest rates with direct and indirect loan markets," Journal of Macroeconomics, Elsevier, vol. 17(3), pages 515-531.
    12. Bacchetta, Philippe & Caminal, Ramon, 1992. "Optimal seigniorage and financial liberalization," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 518-538, December.
    13. Joydeep Bhattacharya & Mark G. Guzman & Elisabeth Huybens & Bruce D. Smith, 1995. "Monetary, Fiscal, and Bank Regulatory Policy in a Simple Monetary Growth Model," Working Papers 9501, Centro de Investigacion Economica, ITAM.
    14. Brock, Philip L, 1989. "Reserve Requirements and the Inflation Tax," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 106-121, February.
    15. Bhattacharya, Joydeep, et al, 1997. "Monetary, Fiscal, and Reserve Requirement Policy in a Simple Monetary Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 321-350, May.
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    Cited by:

    1. Rangan Gupta, 2005. "A Generic Model of Financial Repression," Working papers 2005-20, University of Connecticut, Department of Economics, revised Jul 2005.

    More about this item

    Keywords

    Inflation tax; Reserve requirement; Factor-price frontier;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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