Recently, Liu Zehao, Associate Professor of the School of Finance, Renmin University of China (RUC) published an article entitled “A Fiscal Theory of Money and Bank Liquidity Provision” on Journal of Economic Theory, a leading journal in the field of economic theory. 

Another two authors are He Ping, Professor of the School of Economics and Management, Tsinghua University, and Xie Chengbo, Assistant Professor of the School of Finance, Southwestern University of Finance and Economics.

Prof Liu’s research interests mainly include banking, financial intermediation, financial crisis, monetary economics, and Chinese economy. His research results have been published on journals such as Journal of Economic Theory, Journal of Financial Intermediation, Economic Theory, China Economic Review, and so on.

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 reallocates 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. Moreover, imposing taxes influences the incentive of private information production, which may create a constraint on optimal fiscal policy.

For more details, please refer to https://doi.org/10.1016/j.jet.2023.105744.