Monetary Policy with 100 Percent Reserve Banking: An Exploration

Edward Prescott and Ryan Wessel

No 22431, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore monetary policy in a world without fractional reserve banking. In our world, banks are purely transaction institutions. Money is a form of government debt that bears interest, which can be negative as well as positive. Services of money are a factor of production. We show that the national accounts must be revised in this world. Using our baseline economy, we determine a balanced growth path for a set of money interest rate policy regimes. Besides this interest rate, the only policy variable that differs across regimes is the labor income tax rate. Within this set of policy regimes, there is a balanced growth welfare-maximizing regime. We show that Friedman monetary satiation without deflation is possible in this world. We also examine a set of inflation rate targeting regimes. Here, the only other policy variable that differs across regimes is the inflation rate.

JEL-codes: E4 E5 E6 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: ME
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Citations: View citations in EconPapers (7)

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