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Interest on Cash with Endogenous Fiscal Policy

Author

Listed:
  • Alexei Deviatov

    (Pennsylvania State University)

  • Neil Wallace

    (Pennsylvania State University)

Abstract

Monetary policy and the welfare cost of inflation cannot be studied without some specification of allowable fiscal instruments. Here, feasible policies are implied by the frictions imposed to get roles for money and credit. The model has extreme versions of an above-ground economy and a benign underground economy. The former consists of people who are perfectly monitored and who, therefore, can be taxed; while the latter consists of people who are anonymous and, who, therefore, cannot be taxed. For various examples, ex ante (representative-agent) optima are computed. For most examples for the outside-money version of the model, it is not optimal to use taxes to raise the return on money held by anonymous people.

Suggested Citation

  • Alexei Deviatov & Neil Wallace, 2010. "Interest on Cash with Endogenous Fiscal Policy," Working Papers 2010-012, Becker Friedman Institute for Research In Economics.
  • Handle: RePEc:bfi:wpaper:2010-012
    as

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    File URL: https://econresearch.uchicago.edu/sites/econresearch.uchicago.edu/files/MFI-2010-012.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    interest on cash; matching; monitoring; mechanism design; inside money; outside money;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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