Government Finance and the Demand for Money - the Relationship Between Taxation and the Acceptability of Fiat Money

Mack Ott () and John Tatom
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Mack Ott: The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise

No 37, Studies in Applied Economics from The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise

Abstract: Requiring taxes to be paid in domestic money provides a valuable characteristic for a state’s money. In the case of a state’s fiat money, it is the foundation for money demand and hence to the development of a financial system built around state money. Except for relatively highly taxed countries, where taxes may encourage tax avoidance and holding bank deposits, the level of taxation is a positive factor boosting financial development. Granger causality tests for 65 countries over the past half-century test the relationship between money and government finance. Except for the low-income countries, where there are only five with adequate data, the causal relationship between taxation and money demand is generally supported in the 60 countries making up the three higher income groups.

Keywords: Taxation; financial development; money demand; emerging markets (search for similar items in EconPapers)
JEL-codes: E51 E63 O11 O23 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2015-06
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jhisae:0037

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