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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.

Suggested Citation

  • Shouyong Shi, 2002. "Nominal Bonds and Interest Rates: The Case of One-Period Bonds," Working Papers shouyong-03-03, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:shouyong-03-03
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    References listed on IDEAS

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    1. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
    2. Edward J. Green & Ruilin Zhou, "undated". "A Rudimentary Model of Search with Divisible Money and Prices," Penn CARESS Working Papers 2772f94306e08ef7292945588, Penn Economics Department.
    3. 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 847-869, November.
    4. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
    5. 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.
    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, August.
    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. Shouyong Shi, 1996. "Credit and Money in a Search Model with Divisible Commodities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 627-652.
    9. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-141, February.
    10. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
    11. 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.
    12. 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.
    13. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
    14. Shi, Shouyong, 1999. "Search, inflation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 81-103, August.
    15. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June.
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    Cited by:

    1. Shouyong Shi, 2014. "Liquidity, Interest Rates and Output," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 53-95, May.

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    Keywords

    Search; Money; Bonds; Interest Rates.;
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