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The Societal Benefits of Money and Interest Bearing Debt

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Abstract

A long standing issue in monetary theory is whether money and interest bearing debt may both play a beneficial role in facilitating transactions. This paper identifies in the misallocation of liquidity a key element to provide an answer. In a search model of money, we show that there exists an equilibrium which resembles a liquidity trap, in which debt and money are used interchangeably to trade goods and debt carries no interest, and a Pareto superior equilibrium in which money is used to trade goods and interest bearing debt to reshuffle misallocated liquidity. Monetary policy has no effect in the liquidity trap, and a liquidity e¤ect in the Pareto superior equilibrium.

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  • Luis Araujo & Leo Ferraris, 2019. "The Societal Benefits of Money and Interest Bearing Debt," CEIS Research Paper 453, Tor Vergata University, CEIS, revised 19 Feb 2019.
    • Handle: RePEc:rtv:ceisrp:453
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    Keywords

    Money; Debt; Bonds; Monetary Policy;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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