Article thumbnail
Location of Repository

The Optimal structure of Liquidity Provided by a Self Financed Central Bank

By Miquel Faig


Central banks have consistently differentiated the return on the securities they have issued (money and national debt). In contrast, first best efficiency demands that these securities earn the same return: the return on capital. A self-financed central bank, without capital and taxes, cannot achieve this first best. The resulting gaps between the return on capital and the returns on public securities are implicit taxes. These taxes increase the opportunity costs of the commodities financed with the liquidation of these securities, so they are indirect taxes on these commodities. Because taxes on investment are less efficient than taxes on consumption, securities intensive in financing investment should be taxed at a lower rate than securities intensive in financing consumption. This is feasible if national debt is investment intensive. Then, this security should earn interest and be imposed artificial costs on second hand trading. In addition, because money is specialized in providing short term liquidity, raising the return on national debt delays expenditure toward the future. Hence, the payment of interest on national debt brings a windfall of resources during transitions across balanced paths in addition to the long term welfare gains of this policy. Similar arguments apply to short and long term maturities of the national debt.

OAI identifier:

Suggested articles


  1. (1979). (1980b): "Transaction Demand for Money and Moral Hazard," in Models of Monetary Economies,
  2. (1996). A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles,"
  3. (1975). Asset management with trading uncertainty,"
  4. (1991). Asset Returns with Transactions Costs and Uninsured Individual Risk."
  5. (1983). Bank Runs, Deposit Insurance, and Liquidity,"
  6. (1988). Characterization of the Optimal Tax on Money when it Functions as a Medium of Exchange,"
  7. (1998). Dynamic Progamming with Homogeneous Functions."
  8. (1990). Government Spending in a Simple Model of Endogenous Growth,"
  9. (1998). Money in a Model with Overlapping Production Activities,"
  10. (1997). Money, Banking, and Capital Formation,"
  11. (1980). Nontransferable Interest-Bearing National Debt,"
  12. (1998). Private and Public Supply of Liquidity,"
  13. (1990). Public Debt as Private Liquidity," American Economic Review: Papers and
  14. (1983). The Effects of Inflation on Real Interest Rates,"
  15. (1956). The Interest Elasticity of the Transactions Demand for Cash,"
  16. (1983). The Non-Adjustment of Nominal Interest Rates: A Study of the Fisher Effect,"
  17. (1986). The Optimum Quantity of Money Rule in the Theory of Public Finance,"
  18. (1998). The Optimum Quantity of Money Versus the Private Ownership of Capital,"
  19. (1969). The Optimum Quantity of Money,"
  20. (1980). The Optimum Quantity of Money," in Models of Monetary Economies,
  21. (1952). The Transactions Demand for Cash,"
  22. (1995). U.S. Treasury Bills Forward and Futures Prices,"
  23. (1993). Why Should Governments Issue Bonds?,"

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.