Welfare Improvement from Restricting the Liquidity of Nominal Bonds
AbstractIn 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 InfoPaper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-212.
Length: 28 pages
Date of creation: 07 Mar 2006
Date of revision:
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Nominal Bonds; Liquidity; Money; Efficiency.;
Other versions of this item:
- Shouyong Shi, 2006. "Welfare improvement from restricting the liquidity of nominal bonds," 2006 Meeting Papers 245, Society for Economic Dynamics.
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-11 (All new papers)
- NEP-DGE-2006-03-11 (Dynamic General Equilibrium)
- NEP-FMK-2006-03-11 (Financial Markets)
- NEP-MAC-2006-03-11 (Macroeconomics)
- NEP-MON-2006-03-11 (Monetary Economics)
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