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Essential Interest-Bearing Money

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  • David Andolfatto

    (Simon Fraser University)

Abstract

I examine a version of the Lagos and Wright (2005) monetary model where coercive lump-sum taxation is infeasible. Despite this restriction, I demonstrate that the first-best allocation remains implementable under an appropriately designed monetary policy; at least, if agents are sufficiently patient. The main conclusion is that any incentive-feasible monetary policy necessarily requires a strictly positive nominal interest rate to be paid on money balances.

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File URL: http://www.eief.it/files/2012/09/wp-02-essential-interest-bearing-money.pdf
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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0802.

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Length: 16 pages
Date of creation: 2008
Date of revision: Oct 2008
Handle: RePEc:eie:wpaper:0802

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  1. Andolfatto, David, 2007. "Incentives and the Limits to Deflationary Policy," MPRA Paper 4681, University Library of Munich, Germany.
  2. Shouyong Shi, 2006. "Welfare improvement from restricting the liquidity of nominal bonds," 2006 Meeting Papers, Society for Economic Dynamics 245, Society for Economic Dynamics.
  3. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper, Federal Reserve Bank of Cleveland 0407, Federal Reserve Bank of Cleveland.
  4. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper, Federal Reserve Bank of Cleveland 0405, Federal Reserve Bank of Cleveland.
  5. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  6. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, David K. Levine.
  7. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report, Federal Reserve Bank of Minneapolis 346, Federal Reserve Bank of Minneapolis.
  8. Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, Elsevier, vol. 108(2), pages 179-193, February.
  9. Harold L. Cole & Narayana R. Kocherlakota, 1998. "Zero nominal interest rates: why they're good and how to get them," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-10.
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