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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Aleksander Berentsen & Gabriele Camera & Christopher Waller, .
"Money, Credit and Banking,"
IEW - Working Papers
iewwp219, Institute for Empirical Research in Economics - IEW.
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