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Costly State Monitoring and Reserve Requirements

  • Rangan Gupta

    (University of Connecticut and University of Pretoria)

The paper explores one rationale behind the existence of financial repression, with the latter being represented through the obligatory "high" reserve requirement for the banks. Using an overlapping generation production-economy-monetary model characterized by the possibility of banking crisis, we try and answer whether at all these high reserve requirements are related to discipline the banks. Results indicate that economies with higher probability of banking crisis should optimally choose higher income taxation. The correlation between optimal reserve requirements and probability of crisis is positive only when the social planner has exhausted his ability of income taxation.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2004-33.

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Length: 46 pages
Date of creation: Oct 2004
Date of revision: Jul 2005
Handle: RePEc:uct:uconnp:2004-33
Note: This is a revised version of the fifth chapter of my dissertation at the University of Connecticut. I am particularly grateful to my advisors Christian Zimmermann and Dhammika Dharmapala for many helpful comments and discussions. All remaining errors are mine. Email:
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