The optimal structure of liquidity provided by a self-financed central bank

Self-financed central banks, without capital and taxes, cannot pay the retu rn on capital to both money and national debt. The gaps between the returns on capital and public securities are implicit taxes, which are shifted for ward to commodities that people finance with these securities. Because taxe s on investment are less efficient than taxes on consumption, the national debt should earn interest if people use it to finance expenditures that are investment intensive. Also, because money provides short-term liquidity, r aising the return on national debt delays expenditure to the future. Hence, paying interest on national debt brings a resource windfall during transit ions.