Working Paper: NBER ID: w22431
Authors: Edward C. Prescott; Ryan Wessel
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.
Keywords: monetary policy; 100 percent reserve banking; Friedman monetary satiation
JEL Codes: E4; E5; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rate on money (E43) | labor tax rate (J89) |
| inflation rate (E31) | labor income tax rate (J89) |
| labor income tax rate (J89) | consumption (E21) |
| interest rates (E43) | labor tax rate (J89) |
| inflation rate (E31) | labor income tax burden (J39) |
| labor income tax burden (J39) | consumption (E21) |