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On the Societal Benefits of Illiquid Bonds

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Author Info

  • David Andolfatto

    (Federal Reserve Bank of St. Louis, Simon Fraser University, and the Rimini Centre for Economic Analysis)

Abstract

Kocherlakota (2003) presents an example of a monetary economy where efficiency is enhanced with the introduction of a nominally risk-free bond that is specifically designed to be illiquid. In his environment, an asset market involving swaps of money for bonds effects a socially desirable redistribution of purchasing power that might otherwise be replicated by a policy of type-contingent money transfers. In this paper, I recast Kocherlakota’s model in a fully dynamic quasilinear model and characterize optimal interventions when type-contingent transfers are feasible and when they are not. When they are not, an illiquid bond is essential. However, I also find that an illiquid bond may remain essential even when type-contingent transfers are feasible.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 13_09.

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Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:rim:rimwps:13_09

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  1. 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.
  2. Boel, Paola & Camera, Gabriele, 2006. "Efficient monetary allocations and the illiquidity of bonds," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1693-1715, October.
  3. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
  4. Shouyong Shi, 2008. "Efficiency Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-329, University of Toronto, Department of Economics.
  5. Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, vol. 108(2), pages 179-193, February.
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Cited by:
  1. Boel, Paola & Camera, Gabriele, 2009. "Financial sophistication and the distribution of the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 968-978, October.

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