IDEAS home Printed from https://ideas.repec.org/p/uct/uconnp/2004-33.html
   My bibliography  Save this paper

Costly State Monitoring and Reserve Requirements

Author

Listed:
  • Rangan Gupta

    (University of Connecticut and University of Pretoria)

Abstract

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.

Suggested Citation

  • Rangan Gupta, 2004. "Costly State Monitoring and Reserve Requirements," Working papers 2004-33, University of Connecticut, Department of Economics, revised 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: Rangan.2.Gupta@huskymail.uconn.edu
    as

    Download full text from publisher

    File URL: http://web2.uconn.edu/economics/working/2004-33r.pdf
    File Function: Full text (revised version)
    Download Restriction: no

    File URL: http://web2.uconn.edu/economics/working/2004-33.pdf
    File Function: Full text (first version)
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eduardo J. J. Ganapolsky, 2003. "Reserve requirements, bank runs, and optimal policies in small open economies," FRB Atlanta Working Paper 2003-39, Federal Reserve Bank of Atlanta.
    2. Friedrich Schneider & Robert Klinglmair, 2004. "Shadow economies around the world: what do we know?," Economics working papers 2004-03, Department of Economics, Johannes Kepler University Linz, Austria.
    3. Espinosa-Vega, Marco A & Yip, Chong K, 1999. "Fiscal and Monetary Policy Interactions in an Endogenous Growth Model with Financial Intermediaries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 595-615, August.
    4. Ayse Imrohoroglu & Edward C. Prescott, 1991. "Seigniorage as a tax: a quantitative evaluation," Proceedings, Federal Reserve Bank of Cleveland, pages 462-482.
    5. Bayoumi, Tamim A, 1993. "Financial Deregulation and Consumption in the United Kingdom," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 536-539, August.
    6. Stephen D. Williamson, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 102(1), pages 135-145.
    7. Holman, Jill A. & Neanidis, Kyriakos C., 2006. "Financing government expenditures in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1315-1337, August.
    8. Fu-Sheng Hung, 2001. "Fiscal, Monetary, and Reserve Requirement Policy in an Endogenous Growth with Financial Market Imperfections," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(1), pages 61-82, June.
    9. Roubini, Nouriel & Sala-i-Martin, Xavier, 1995. "A growth model of inflation, tax evasion, and financial repression," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 275-301, April.
    10. Bencivenga, Valerie R & Smith, Bruce D, 1992. "Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 767-790, October.
    11. Di Giorgio, Giorgio, 2002. "Financial intermediation and capital investment with costly monitoring," International Review of Economics & Finance, Elsevier, vol. 11(1), pages 27-43, April.
    12. Been-Lon Chen & Yeong-Yuh Chiang & Ping Wang, 2000. "Credit Market Imperfections, Financial Activity and Economic Growth," Vanderbilt University Department of Economics Working Papers 0020, Vanderbilt University Department of Economics.
    13. Ayse Imrohoroglu & Edward C. Prescott, 1991. "Seigniorage as a tax: a quantitative evaluation," Staff Report 132, Federal Reserve Bank of Minneapolis.
    14. Demirguc-Kent, Asli & Detragiache, Enrica, 1998. "Financial liberalization and financial fragility," Policy Research Working Paper Series 1917, The World Bank.
    15. Been-Lon Chen, 2003. "Tax Evasion in a Model of Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 381-403, April.
    16. Freeman, Scott, 1987. "Reserve requirements and optimal seigniorage," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 307-314, March.
    17. Bacchetta, Philippe & Caminal, Ramon, 1992. "Optimal seigniorage and financial liberalization," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 518-538, December.
    18. Christian Zimmermann, 1994. "Technology Innovations and the Volatility of Output: An International Perspective," Cahiers de recherche CREFE / CREFE Working Papers 34, CREFE, Université du Québec à Montréal.
    19. Edward Simpson Prescott, 2004. "State-contingent bank regulation with unobserved actions and unobserved characteristics," Working Paper 04-02, Federal Reserve Bank of Richmond.
    20. Marshall, David A. & Prescott, Edward Simpson, 2006. "State-contingent bank regulation with unobserved actions and unobserved characteristics," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2015-2049, November.
    21. Joshua Aizenman & Stephen J. Turnovsky, 2002. "Reserve Requirements on Sovereign Debt in the Presence of Moral Hazard -- on Debtors or Creditors?," Economic Journal, Royal Economic Society, vol. 112(476), pages 107-132, January.
    22. Stacey L. Schreft & Bruce D. Smith, 2002. "The conduct of monetary policy with a shrinking stock of government debt," Proceedings, Federal Reserve Bank of Cleveland, pages 848-886.
    23. Azariadis, Costas & Smith, Bruce D, 1996. "Private Information, Money, and Growth: Indeterminacy, Fluctuations, and the Mundell-Tobin Effect," Journal of Economic Growth, Springer, vol. 1(3), pages 309-332, September.
    24. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, pages 953-963.
    25. Yanelle, Marie-Odile, 1989. "The strategic analysis of intermediation," European Economic Review, Elsevier, vol. 33(2-3), pages 294-301, March.
    26. Rangan Gupta, 2005. "Financial Liberalization and Inflationary Dynamics," Working papers 2005-31, University of Connecticut, Department of Economics.
    27. Stacey L. Schreft & Bruce D. Smith, 1994. "The effects of open market operations in a model of intermediation and growth," Working Paper 94-10, Federal Reserve Bank of Richmond.
    28. 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.
    29. Stacey L. Schreft & Bruce D. Smith, 2002. "The conduct of monetary policy with a shrinking stock of government debt," Proceedings, Federal Reserve Bank of Cleveland, pages 848-886.
    30. Helpman, Elhanan & Sadka, Efraim, 1979. "Optimal Financing of the Government's Budget: Taxes, Bonds, or Money?," American Economic Review, American Economic Association, pages 152-160.
    31. Stacey L. Schreft & Bruce D. Smith, 1998. "The Effects of Open Market Operations in a Model of Intermediation and Growth," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 519-550.
    32. Kwanghee Nam & Thomas F. Cooley, 1998. "Asymmetric information, financial intermediation, and business cycles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(3), pages 599-620.
    33. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, pages 5-30.
    34. Joydeep Bhattacharya & Joseph H. Haslag, 2001. "On the Use of the Inflation Tax When Nondistortionary Taxes Are Available," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 823-841, October.
    35. Ayse Imrohoroglu & Edward C. Prescott, 1991. "Seigniorage as a tax: a quantitative evaluation," Proceedings, Federal Reserve Bank of Cleveland, pages 462-482.
    36. Marco A. Espinosa-Vega & Chong K. Yip, 1996. "An endogenous growth model of money, banking, and financial repression," FRB Atlanta Working Paper 96-4, Federal Reserve Bank of Atlanta.
    37. Espinosa-Vega, Marco A, 1995. "Multiple Reserve Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 762-776, August.
    38. Basu, Parantap, 2001. "Reserve Ratio, Seigniorage and Growth," Journal of Macroeconomics, Elsevier, pages 397-416.
    39. Greg Kaplan, 2012. "Moving Back Home: Insurance against Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 446-512.
    40. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, pages 537-555.
    41. Gray, Jo Anna & Wu, Ying, 1995. "On equilibrium credit rationing and interest rates," Journal of Macroeconomics, Elsevier, pages 405-420.
    42. Di Giorgio, Giorgio, 1999. "Financial development and reserve requirements," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1031-1041, July.
    43. Rangan Gupta, 2005. "A Generic Model of Financial Repression," Working papers 2005-20, University of Connecticut, Department of Economics, revised Jul 2005.
    44. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
    45. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, pages 5-30.
    46. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cerqueti, Roy & Coppier, Raffaella, 2011. "Economic growth, corruption and tax evasion," Economic Modelling, Elsevier, pages 489-500.
    2. Gupta, Rangan, 2008. "Tax evasion and financial repression," Journal of Economics and Business, Elsevier, pages 517-535.
    3. Rangan Gupta & Cobus Vermeulen, 2010. "Private and Public Health Expenditures in an Endogenous Growth Model with Inflation Targeting," Annals of Economics and Finance, Society for AEF, pages 139-153.
    4. Bittencourt, Manoel & Gupta, Rangan & Stander, Lardo, 2014. "Tax evasion, financial development and inflation: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 194-208.
    5. Gupta, Rangan, 2008. "Tax evasion and financial repression," Journal of Economics and Business, Elsevier, pages 517-535.

    More about this item

    Keywords

    Reserve requirements; Tax evasion; Information Asymmetry in Financial Markets; Costly state verification.;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uct:uconnp:2004-33. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark McConnel). General contact details of provider: http://edirc.repec.org/data/deuctus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.