A Fiscal Theory of Money and Bank Liquidity Provision

74 Pages Posted: 2 Jul 2021 Last revised: 14 Sep 2023

See all articles by Ping He

Ping He

Tsinghua University, SEM

Zehao Liu

School of Finance, Renmin University of China

Chengbo Xie

School of Finance, SWUFE

Date Written: September 14, 2023

Abstract

Fiscal-backed money can provide additional liquidity to consumers and mitigate the liquidity shortage problem in an economy with banks where agents face idiosyncratic liquidity shocks without being fully insured. The government issues fiat money and creates real value for money by levying a tax and accepting money for tax payments. Tax relocates the distribution of liquidity in the economy. An increase in tax, by increasing fiscal surplus and the real value of money, reduces the equilibrium investment. When the real value of money is additionally supported by a demand for bubbles, the government can achieve the same investment with a lower tax.

Keywords: Liquidity Shortage; Fiscal Policy; Banking; Fiat Money; Side Trades

JEL Classification: E52; E62; E63; G21; G28

Suggested Citation

He, Ping and Liu, Zehao and Xie, Chengbo, A Fiscal Theory of Money and Bank Liquidity Provision (September 14, 2023). Available at SSRN: https://ssrn.com/abstract=3874760 or http://dx.doi.org/10.2139/ssrn.3874760

Ping He

Tsinghua University, SEM ( email )

Beijing, 100084
China
8610-62795754 (Phone)
8610-62784554 (Fax)

HOME PAGE: http://www.sem.tsinghua.edu.cn/en/heping

Zehao Liu (Contact Author)

School of Finance, Renmin University of China ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

Chengbo Xie

School of Finance, SWUFE ( email )

Gezhi Building, SWUFE
518
Chengdu, Sichuan
China

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