Seigniorage in a neoclassical economy: some computational results

Joydeep Bhattacharya and Joseph Haslag

No 9901, Working Papers from Federal Reserve Bank of Dallas

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.

Keywords: Economics; Monetary policy; Monetary theory; Bank reserves (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-cmp and nep-dge
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:99-01

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