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Essential Interest-Bearing Money

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Abstract

In this paper, I provide a rationale for why money should earn interest; or, what amounts to the same thing, why risk-free claims to non-interestbearing money should trade at discount. I argue that interest-bearing money is essential when individual money balances are private information. The analysis also suggests one reason for why it is sufficient (as well as necessary) for interest to be paid only on large money balances; or equivalently, why bonds need only be issued in large denominations.

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File URL: http://www.econ.sfu.ca/research/RePEc/sfu/sfudps/dp07-16.pdf
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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp07-16.

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Length: 14 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:sfu:sfudps:dp07-16

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Web: http://www.sfu.ca/economics/research/publications.html

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  1. Andolfatto, David, 2007. "Incentives and the Limits to Deflationary Policy," MPRA Paper 4681, University Library of Munich, Germany.
  2. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, David K. Levine.
  3. Shouyong Shi, 2006. "Welfare improvement from restricting the liquidity of nominal bonds," 2006 Meeting Papers 245, Society for Economic Dynamics.
  4. Ricardo Lagos & Guillaume Rocheteau, 2005. "Inflation, Output, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 495-522, 05.
  5. Harold L. Cole & Narayana R. Kocherlakota, 1998. "Zero nominal interest rates: why they're good and how to get them," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-10.
  6. Narayana Kocherlakota, 2003. "Societal Benefits of Illiquid Bonds," Levine's Working Paper Archive 506439000000000300, David K. Levine.
  7. 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.
  8. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  9. 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.
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