A fiscal theory of money and bank liquidity provision

Ping He, Zehao Liu and Chengbo Xie

Journal of Economic Theory, 2023, vol. 214, issue C

Abstract: Fiscal-backed money can provide additional liquidity to consumers and mitigate the liquidity shortage problem in an economy with banks where agents face idiosyncratic liquidity shocks without being fully insured. The government issues fiat money and creates real value for money by levying a tax and accepting money for tax payments. Tax reallocates the distribution of liquidity in the economy. An increase in tax, by increasing fiscal surplus and the real value of money, reduces the equilibrium investment. Additionally, imposing taxes influences the incentive of private information production, which may impose a constraint on optimal fiscal policy.

Keywords: Liquidity shortage; Fiscal policy; Banking; Fiat money; Side trades (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 G21 G28 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:214:y:2023:i:c:s0022053123001400

DOI: 10.1016/j.jet.2023.105744

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