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Welfare Improvement from Restricting the Liquidity of Nominal Bonds

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  • Shouyong Shi

Abstract

In this paper I examine whether a society can improve welfare by imposing a legal restriction to forbid the use of nominal bonds as a means of payments for goods. To do so, I integrate a microfounded model of money with the framework of limited participation. While the asset market is Walrasian, the goods market is decentralized and the legal restriction is imposed only in a fraction of the trades. I show that the legal restriction can improve the society's welfare. In contrast to the literature, this essential role of the legal restriction persists even in the steady state and it does not rely on households' ability to trade unmatured bonds for money after observing the taste (or endowment) shocks.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-212.

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Length: 28 pages
Date of creation: 07 Mar 2006
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-212

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Keywords: Nominal Bonds; Liquidity; Money; Efficiency.;

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References

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  1. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
  2. Miquel Faig, 2006. "Divisible Money In An Economy With Villages," Working Papers tecipa-216, University of Toronto, Department of Economics.
  3. Shouyong Shi, 2005. "Nominal Bonds And Interest Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 579-612, 05.
  4. Hicks, J. R., 1975. "Value and Capital: An Inquiry into some Fundamental Principles of Economic Theory," OUP Catalogue, Oxford University Press, edition 2, number 9780198282693.
  5. Stephen D. Williamson, 2005. "Monetary Policy and Distribution," 2005 Meeting Papers 379, Society for Economic Dynamics.
  6. Boel, Paola & Camera, Gabriele, 2004. "Efficient Monetary Allocations and the Illiquidity of Bonds," Purdue University Economics Working Papers 1171, Purdue University, Department of Economics.
  7. Neil Wallace, 1983. "A legal restrictions theory of the demand for "money" and the role of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  8. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
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Cited by:
  1. Andolfatto, David, 2010. "Essential interest-bearing money," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1495-1507, July.
  2. Andolfatto, David, 2008. "Essential Interest-Bearing Money (2008)," MPRA Paper 8565, University Library of Munich, Germany.

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