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Nominal Bonds and Interest Rates: The Case of One-Period Bonds

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  • Shouyong Shi

Abstract

This paper is the first step in the integration of the (search-theoretic) microfoundation of monetary theory into the fruitful analysis by Lucas (1990). I construct two search models, in which fiat money coexists in equilibrium with default-free nominal bonds issued by the government, and then use the models to analyze the effects of money growth and open market operations. In the first model, matured bonds circulate in the goods market as perfect substitutes for money and there are a continuum of stationary equilibria of this sort. In the second model, matured bonds do not circulate in the goods market and there is a unique stationary equilibrium. In both models, newly issued bonds are sold at a discount for money and thus they bear positive interest. The effects of monetary policies differ in these two economies.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number shouyong-03-03.

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Length: 28 pages
Date of creation: 11 Jul 2002
Date of revision:
Handle: RePEc:tor:tecipa:shouyong-03-03

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Related research

Keywords: Search; Money; Bonds; Interest Rates.;

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References

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  1. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
  2. Shouyong Shi, 1995. "Credit and Money in a Search Model with Divisible Commodities," Working Papers 917, Queen's University, Department of Economics.
  3. Nobuhiro Kiyotaki & Randall Wright, 1989. "A contribution to the pure theory of money," Staff Report 123, Federal Reserve Bank of Minneapolis.
  4. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  5. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June.
  6. 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.
  7. Rao Aiyagari, S. & Wallace, Neil & Wright, Randall, 1996. "Coexistence of money and interest-bearing securities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 397-419, June.
  8. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  9. Shouyong Shi, 1998. "Search, Inflation, and Capital Accumulation," Working Papers 971, Queen's University, Department of Economics.
  10. Shouyong Shi, 2001. "Liquidity, Bargaining, and Multiple Equilibria in a Search Monetary Model," Annals of Economics and Finance, Society for AEF, vol. 2(2), pages 325-351, November.
  11. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
  12. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  13. Edward J. Green & Ruilin Zhou, . "A Rudimentary Model of Search with Divisible Money and Prices," Penn CARESS Working Papers 2772f94306e08ef7292945588, Penn Economics Department.
  14. Wallace, Neil, 2001. "Whither Monetary Economics?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 847-69, November.
  15. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
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Cited by:
  1. Shouyong Shi, 2003. "Liquidity, Interest Rates and Output," Levine's Bibliography 666156000000000250, UCLA Department of Economics.

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