Reserve Requirements and the Inflation Tax

Philip L Brock

Journal of Money, Credit and Banking, 1989, vol. 21, issue 1, 106-21

Abstract: The inflation tax on currency and required bank reserves is modeled in a general equilibrium setting by specifying a transactions technology in which currency and demand deposits allow agents to economize on time spent transacting in the goods market. Revenue-maximizing conditions for the nominal interest rate and reserve ratio are analyzed. For any given revenue requirement less than the revenue-maximizing level, minimization of the welfare costs of inflationary finance results in the choice of a combination of the interest rate and reserve ratio that lies on a set of tangency points formed by iso-revenue and iso-welfare curves. Copyright 1989 by Ohio State University Press.

Date: 1989
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