Essential Interest-Bearing Money

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Essential Interest-Bearing Money

Author Info

Andolfatto, David

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David Andolfatto

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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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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Other versions of this item:

Paper
- David Andolfatto, 2007. "Essential Interest-Bearing Money," Discussion Papers dp07-16, Department of Economics, Simon Fraser University. [Downloadable!]

Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-09-16 (All new papers)
NEP-CBA-2007-09-16 (Central Banking)
NEP-DGE-2007-09-16 (Dynamic General Equilibrium)
NEP-MAC-2007-09-16 (Macroeconomics)
NEP-MON-2007-09-16 (Monetary Economics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Ricardo Lagos & Guillaume Rocheteau, 2005. "Inflation, Output, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 495-522, 05. [Downloadable!] (restricted)
Other versions:
- Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output and welfare," Staff Report 342, Federal Reserve Bank of Minneapolis. [Downloadable!]
- Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper 0407, Federal Reserve Bank of Cleveland. [Downloadable!]
David Andolfatto, 2007. "Incentives and the Limits to Deflationary Policy," Discussion Papers dp07-14, Department of Economics, Simon Fraser University. [Downloadable!]
Other versions:
- Andolfatto, David, 2007. "Incentives and the Limits to Deflationary Policy," MPRA Paper 4681, University Library of Munich, Germany, revised 02 Sep 2007. [Downloadable!]
Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, vol. 108(2), pages 179-193, February. [Downloadable!] (restricted)
Other versions:
- Narayana Kocherlakota, 2003. "Societal Benefits of Illiquid Bonds," Levine's Bibliography 506439000000000300, UCLA Department of Economics. [Downloadable!]
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. [Downloadable!]
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. [Downloadable!] (restricted)
Shouyong Shi, 2006. "Welfare Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-212, University of Toronto, Department of Economics. [Downloadable!]
Other versions:
- Shouyong Shi, 2006. "Welfare improvement from restricting the liquidity of nominal bonds," 2006 Meeting Papers 245, Society for Economic Dynamics. [Downloadable!]
Ricardo Lagos and 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.
Other versions:
- Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis. [Downloadable!]
- Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland. [Downloadable!]

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