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A Note on Reserve Requirements and Public Finance
International Review of Economics and Finance
We use a simple general equilibrium model to show that any allocation (private consumption, real cash balances, and government spending) supported by a policy that involves reserve requirements (plus inflation and public debt) can also be supported by a policy that uses a direct tax on bank deposits (plus inflation and public debt), and vice-versa. In particular, a proportional reserve requirement is equivalent to a proportional tax on deposits plus an open market sale of bonds of an amount equal to banks' reserves.
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