The Economic Effects of Inflation Tax Instruments in an
Overlapping-Generations Economy with Production

Jianhuai Shi

Most inflation tax literature considers currency as the entire monetary base. In reality, however, many countries impose inflation tax on the required reserves of the banking system as well as on currency. Developing countries in particular usually augment the currency component of the monetary base by imposing high reserve requirements on bank deposits. This paper incorporates financial intermediaries into a general equilibrium setting in order to analyze the reserve component of the inflation tax. We present a Diamond-type overlapping-generations model in the context of a developing open economy, and analyze the economic consequences of changes in the reserve requirement and the rate of inflation. The model displays some results that are different from those of the existing literature.