Essential Interest-Bearing Money (2008)
AbstractI 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 8565.
Date of creation: 03 May 2008
Date of revision:
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-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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