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The Optimal Structure of Liquidity Provided by a Self-Financed Central Bank

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  • Faig, Miquel

Abstract

Self-financed central banks, without capital and taxes, cannot pay the return on capital to both money and national debt. The gaps between the returns on capital and public securities are implicit taxes, which are shifted forward to commodities that people finance with these securities. Because taxes on investment are less efficient than taxes on consumption, the national debt should earn interest if people use it to finance expenditures that are investment intensive. Also, because money provides short-term liquidity, raising the return on national debt delays expenditure to the future. Hence, paying interest on national debt brings a resource windfall during transitions.

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  • Faig, Miquel, 2000. "The Optimal Structure of Liquidity Provided by a Self-Financed Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 746-765, November.
    • Handle: RePEc:mcb:jmoncb:v:32:y:2000:i:4:p:746-65
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    Cited by:

    1. Faig, Miquel, 2000. "Money with Idiosyncratic Uninsurable Returns to Capital," Journal of Economic Theory, Elsevier, vol. 94(2), pages 218-240, October.
    2. Faig, Miquel & Gagnon, Gregory, 2008. "Scarce collateral and bank reserves," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1723-1737, December.
    3. Mr. Obert Nyawata, 2012. "Treasury Bills and/Or Central Bank Bills for Absorbing Surplus Liquidity: The Main Considerations," IMF Working Papers 2012/040, International Monetary Fund.

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    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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