Essential Interest-Bearing Money (2008)

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Essential Interest-Bearing Money (2008)

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Andolfatto, David

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David Andolfatto

Abstract

I consider a model of intertemporal trade where agents lack commitment, agent types are private information, there is an absence of recordkeeping, and societal penalties are infeasible. Despite these frictions, I demonstrate that policy can be designed to implement the first-best allocation as a (stationary) competitive monetary equilibrium. The optimal policy requires a strictly positive interest rate with the aggregate interest expenditure financed in part by an inflation tax and in part by an incentive-compatible lump-sum fee. An illiquid bond is essential only in the event that paying interest on money is prohibitively costly.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8565.

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Date of creation: 03 May 2008
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Handle: RePEc:pra:mprapa:8565

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E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-05-10 (All new papers)
NEP-CBA-2008-05-10 (Central Banking)
NEP-CTA-2008-05-10 (Contract Theory & Applications)
NEP-DGE-2008-05-10 (Dynamic General Equilibrium)
NEP-MAC-2008-05-10 (Macroeconomics)
NEP-MON-2008-05-10 (Monetary Economics)

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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!]
Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August. [Downloadable!] (restricted)
Other versions:
- Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis. [Downloadable!]
Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July. [Downloadable!] (restricted)
Other versions:
- Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
- Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "Money, Credit and Banking," IEW - Working Papers iewwp219, Institute for Empirical Research in Economics - IEW. [Downloadable!]
- Aleksander Berentsen & Gabriele Camera & Christopher Waller, 2005. "Money, Credit and Banking," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Shouyong Shi, 2006. "Welfare improvement from restricting the liquidity of nominal bonds," 2006 Meeting Papers 245, Society for Economic Dynamics. [Downloadable!]
Other versions:
- Shouyong Shi, 2006. "Welfare Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-212, University of Toronto, Department of Economics. [Downloadable!]
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.
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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