Optimal Government Finance And Democracy In Developing Countries
Optimal government finance models illustrating trade-offs between different policy instruments, such as seigniorage and income taxes, have focused on industrialized countries. In this paper, a model that includes the effective reserve ratio and currency growth rate as instruments is derived from a welfare loss function and is estimated using fixed effects for a sample of 29 developing countries. The results indicate that the governments in the sample use the reserve requirement to minimize the welfare losses associated with seigniorage revenue. Mid-level democracies are associated with the highest effective reserve ratios.
Volume (Year): 29 (2004)
Issue (Month): 2 (December)
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