Costly State Monitoring and Reserve Requirements

No 2004-33, Working papers from University of Connecticut, Department of Economics

Abstract: The paper explores one rationale behind the existence of financial repression, with the latter being represented through the obligatory "high" reserve requirement for the banks. Using an overlapping generation production-economy-monetary model characterized by the possibility of banking crisis, we try and answer whether at all these high reserve requirements are related to discipline the banks. Results indicate that economies with higher probability of banking crisis should optimally choose higher income taxation. The correlation between optimal reserve requirements and probability of crisis is positive only when the social planner has exhausted his ability of income taxation.

Keywords: Reserve requirements; Tax evasion; Information Asymmetry in Financial Markets; Costly state verification. (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2004-10, Revised 2005-07
New Economics Papers: this item is included in nep-dge
Note: This is a revised version of the fifth chapter of my dissertation at the University of Connecticut. I am particularly grateful to my advisors Christian Zimmermann and Dhammika Dharmapala for many helpful comments and discussions. All remaining errors are mine. Email: Rangan.2.Gupta@huskymail.uconn.edu
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Citations: View citations in EconPapers (14)

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Journal Article: Costly State Monitoring and Reserve Requirements (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2004-33

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