Monetary Policy with 100 Percent Reserve Banking: An Exploration

26 Pages Posted: 25 Jul 2016

See all articles by Edward C. Prescott

Edward C. Prescott

Arizona State University (ASU) - Economics Department; National Bureau of Economic Research (NBER)

Ryan Wessel

Arizona State University (ASU) - Economics Department

Date Written: July 2016

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.

Suggested Citation

Prescott, Edward C. and Wessel, Ryan, Monetary Policy with 100 Percent Reserve Banking: An Exploration (July 2016). NBER Working Paper No. w22431, Available at SSRN: https://ssrn.com/abstract=2813879

Edward C. Prescott (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ryan Wessel

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

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