On the Optimality of Interest-Bearing Reserves in Economies of Overlapping Generations
Paying interest on required reserves is considered in an overlapping generations model in which the return to capital dominates the return to flat money. As Smith (1991) showed, financing interest on reserves benefits the initial old at the expense of future generations. We show that the transfer of wealth associated with interest on reserves can be offset by an accommodating open market purchase, so that the payment of interest on reserves is a Pareto improvement. We also show that paying interest on reserves improves welfare even when financed by distorting taxes on capital.
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Volume (Year): 7 (1996)
Issue (Month): 3 (April)
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References listed on IDEAS
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- Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March.
- Joseph H. Haslag & Scott E. Hein, 1989. "Reserve requirements, the monetary base, and economic activity," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Mar, pages 1-15.
- Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
- 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.
- Sargent, Thomas & Wallace, Neil, 1985. "Interest on reserves," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 279-290, May.
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