Distorting taxes and interest on reserves |
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| Authors: | Esther Fern ndez |
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| Affiliation: | Departamento de Fundamentos del Análisis Económico II, Facultad de, CC Económicas y Empresariales, Universidad Complutense de Madrid, Campus de Somosaguas, 28223 Madrid, Spain |
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| Abstract: | Few governments in developed economies currently pay interest on reserves. However, Goodfriend (2001) [Goodfriend, M., 2001. Interest on reserves and monetary policy, mimeo, Federal Reserve Bank of Richmond] concludes that it is a useful tool to implement monetary policy. In a monetary growth model with a financial intermediary and a firm who needs to borrow to pay wages, it is shown that paying interest on reserves financed by a labor tax reduces welfare. |
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| Keywords: | Reserve requirements Labor tax Cash-in-advance constraint |
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