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Essential Interest-Bearing Money

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  • Andolfatto, David

Abstract

In this paper, I provide a rationale for why money should earn interest; or, what amounts to the same thing, why risk-free claims to non-interest-bearing money should trade at discount. I argue that interest-bearing money is essential when individual money balances are private information. The analysis also suggests one reason for why it is sufficient (as well as necessary) for interest to be paid only on large money balances; or equivalently, why bonds need only be issued in large denominations.

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File URL: http://mpra.ub.uni-muenchen.de/4780/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4780.

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Date of creation: 07 Sep 2007
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Handle: RePEc:pra:mprapa:4780

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Keywords: Money; Bonds; Monetary Policy; Friedman Rule;

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  1. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
  2. Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, vol. 108(2), pages 179-193, February.
  3. David Andolfatto, 2007. "Incentives and the Limits to Deflationary Policy," Discussion Papers dp07-14, Department of Economics, Simon Fraser University.
  4. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  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, vol. 47(3), pages 701-722, 08.
  6. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
  7. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output and welfare," Staff Report 342, Federal Reserve Bank of Minneapolis.
  8. Shouyong Shi, 2006. "Welfare improvement from restricting the liquidity of nominal bonds," 2006 Meeting Papers 245, Society for Economic Dynamics.
  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, issue Spr, pages 2-10.
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