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Societal benefits of nominal bonds

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Author Info
Narayana R. Kocherlakota

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Abstract

In this paper, I provide a possible explanation of why nominally risk-free bonds are essential in monetary economies. I argue that the role of nominal bonds is to serve as record-keeping devices in intertemporal exchanges of money. I show that bonds can only serve this role if they are illiquid (costly to exchange for goods). Finally, I show that in economies in which nominal bonds are essential, welfare and nominal interest rates are both positively associated with the supply of illiquid bonds (if that supply is small).

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 275.

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Date of creation: 2000
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Handle: RePEc:fip:fedmsr:275

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Related research
Keywords: Bonds ; Money;

References listed on IDEAS
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  1. Mark Huggett & Stefan Krasa, 1996. "Money and storage in a differential information economy (*)," Economic Theory, Springer, vol. 8(2), pages 191-209.
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  2. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December. [Downloadable!] (restricted)
  3. S. Rao Aiyagari & Neil Wallace & Randall Wright, 1996. "Coexistence of money and interest-bearing securities," Working Papers 550, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  4. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August. [Downloadable!] (restricted)
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  5. Harold L. Cole & Narayana R. Kocherlakota, 1999. "Efficient allocations with hidden income and hidden storage," Staff Report 238, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  6. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April. [Downloadable!] (restricted)
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