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Seigniorage in a neoclassical economy: some computational results

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  • Joseph H. Haslag
  • Joydeep Bhattacharya

Abstract

In this paper, we consider a government that executes a permanent open market sale. The government is forced to eventually use money creation to pay for the debt's expenses, choosing between changing either the money growth rate (the inflation-tax rate) or the reserve requirement ratio (the inflation-tax base). We first derive conditions under which each of the two second-best alternative policies are feasible in an economy with neoclassical production. Armed with these conditions, we ask the following question: Which monetary policy action is better in a welfare sense? With neoclassical production, monetary policy potentially has long-run effects on the capital stock and the marginal product of capital. The curvature of the production function is crucial. The computational experiments show, somewhat surprisingly, that a permanent increase in government bonds is financed by either lower reserve requirements or faster money growth. Accordingly, steady-state welfare for all generations is higher under the reserve-requirement policy.

Suggested Citation

  • Joseph H. Haslag & Joydeep Bhattacharya, 1999. "Seigniorage in a neoclassical economy: some computational results," Working Papers 9901, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:99-01
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    File URL: http://www.dallasfed.org/assets/documents/research/papers/1999/wp9901.pdf
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    References listed on IDEAS

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    1. Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 203-223, April.
    2. 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.
    3. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 583-603, May.
    4. Bruce Smith & J. Bhattacharya & Mark Guzman, 1998. "Some Even More Unpleasant Monetarist Arithmetic," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 596-623, August.
    5. Bryant, John & Wallace, Neil, 1980. "Open-Market Operations in a Model of Regulated, Insured Intermediaries," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 146-173, February.
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    Cited by:

    1. Vladimir Z. Nuri, 2002. "Fractional Reserve Banking as Economic Parasitism: A Scientific, Mathematical & Historical Expose, Critique, and Manifesto," Macroeconomics 0203005, EconWPA.
    2. Joydeep Bhattacharya & Joseph H. Haslag, 1999. "Monetary policy arithmetic: some recent contributions," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 26-36.
    3. Marco A. Espinosa-Vega & Steven Russell, 1998. "A public finance analysis of multiple reserve requirements," FRB Atlanta Working Paper 98-1, Federal Reserve Bank of Atlanta.

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    Keywords

    Economics ; Monetary policy ; Monetary theory ; Bank reserves;

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