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In modern
market economies people hold money to facilitate private transactions
and because governments force them to do so by enforcing the `legal
tender' rule in their dealings with private agents, such as tax
payments. In Discussion Paper No. 726, Programme Director Alberto
Giovannini and Bart Turtelboom develop a model in which only
tax payments are subject to this cash requirement. A representative
private agent uses monetary transfers from the central bank and
government, and income from assets (shares in productive capital,
government bonds and money) to trade in the goods and assets markets and
pays taxes at the end of the period. The government finances its
lump-sum payments with lump-sum taxes and a one-period bond. Giovannini
and Turtelboom maintain that their model will perform best in countries
in which tax payments account for the bulk of cash disbursements, or
more precisely where the private velocity of circulation is much higher
than that of money used in government transactions, e.g. a
high-inflation country, in which agents will reduce their money holdings
to the bare minimum. |