The Chicago Tradition and Commercial Bank Seigniorage

Erotokritos Varelas and Gerasimos Soldatos

Research in World Economy, 2014, vol. 5, issue 1, 29-38

Abstract: Chicago rule is shown to be the unique optimal monetary policy rule from the viewpoint of an intergenerational welfare-maximizing social planner. But, in the absence of commercial banking, it really mandates the elimination of the public sector, because it involves the elimination of central bank seigniorage and hence, of the government spending based on this seigniorage, rendering subsequently tax finance incapable of sustaining alone such spending. In the presence of commercial banking, the government does have the option of benefiting from commercial bank seigniorage by borrowing it countercyclically as implied by Chicago rule, which is found to operate like a full-reserve requirement.

Keywords: Chicago rule; Chicago plan; seigniorage; intergenerational modeling (search for similar items in EconPapers)
Date: 2014
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