The paper 'A Fiscal Theory of Money and Bank Liquidity Provision' by Liu Zehao, Associate Professor of the School of Finance and Finance, and his collaborator, Professor He Ping of Tsinghua University and Assistant Professor Xie Chengbo of Southwest University of Finance and Economics, has been published in leading international academic journals. Official publication in the top Journal of Theoretical economics, Journal of Economic Theory (Volume 214, 2023, December 2023)

Abstract

This paper studies the liquidity problem from the perspective of fiscal and monetary policy coordination. By introducing fiscal policy into the theoretical framework of bank liquidity problem, this paper studies the effect of fiscal policy on solving liquidity shortage problem. Tax revenues (fiscal surpluses) support the real value of the nominal currency, so the government can provide more liquidity to illiquid economic agents through a combination of issuing nominal money and allowing taxes to be paid in nominal money. Monetary policy has helped fiscal policy achieve an intertemporal allocation of resources that has never existed before, allowing liquidity to be transferred from groups with excess liquidity to groups with insufficient liquidity, thus improving social welfare. An increase in the tax rate would increase the fiscal surplus, thereby increasing the real value of the currency and further reducing the problem of illiquidity and overinvestment. When the real value of money is supported by additional bubble demand, governments can achieve the same level of social investment and liquidity with lower tax rates. In addition, when there is adverse selection caused by private information production, tax will affect the choice of private information production, which may restrict the realization of the optimal fiscal policy.

• About The Author

Liu Zehao is an associate professor at the Department of Monetary Finance, School of Finance and Finance, Renmin University of China, and Deputy Director of the China Financial Markets and Policy Institute, Renmin University of China. He studied in the Department of Finance, School of Economics and Management, Tsinghua University (PhD in Economics), and the double degree Experimental Class of Finance and Mathematics, Renmin University of China (Bachelor of Economics and Bachelor of Science degrees, and graduated with the highest honor of students - Wu Yuzhang Scholarship). He received his PhD from Yale School of Management. His research interests include money and banking, financial intermediation, financial crisis, China's economy and finance. He has published in Journal of Economic Theory (2 papers), Journal of Financial Intermediation, Economic Theory, China Economy Published papers in international and domestic high-level journals such as Review, 'Economic Research', 'Financial Research', 'Economics (Quarterly Journal)'. He presided over the National Natural Science Foundation project, the Youth Science Fund project, and the Scientific Research Fund project of Renmin University of China. He has won the second Sun Yefang Financial Innovation Award, the Annual Excellent Paper Award of Financial Research, the Excellent Paper Award of China Finance Society, the Best paper Award of China Finance Annual Meeting, and the Outstanding Tutor Award of Renmin University of China for Undergraduate extracurricular teaching.