On the optimality of interest-bearing reserves in economies of overlapping generations (*)

Scott John Freeman and Joseph Haslag ()

Economic Theory, 1996, vol. 7, issue 3, pages 557-565

Abstract: Paying interest on required reserves is considered in an overlapping generations model in which the return to capital dominates the return to fiat money. As Smith (1991) showed, financing interest on reserves benefits the initial old at the expense of future generations. We show that the transfer of wealth associated with interest on reserves can be offset by an accommodating open market purchase, so that the payment of interest on reserves is a Pareto improvement. We also show that paying interest on reserves improves welfare even when financed by distorting taxes on capital.

Date: 1996
Note: Received: March 25, 1994; revised version July 28, 1994
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Related works:
Working Paper: On the optimality of interest-bearing reserves in economies of overlapping generations (1993)
Journal Article: On the Optimality of Interest-Bearing Reserves in Economies of Overlapping Generations (1996)
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