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Outside Versus Inside Bonds

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Author Info

  • Aleksander Berentsen
  • Christopher Waller

Abstract

When agents are liquidity constrained, two options exist — borrow or sell assets. We compare the welfare properties of these options in two economies: in one, agents can borrow (issue inside bonds) and in the other they can sell government bonds (outside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds and that the converse is not true. Moreover, under best policies, the allocation with outside bonds strictly Pareto dominates the allocation with inside bonds.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 372.

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Date of creation: May 2008
Date of revision:
Handle: RePEc:zur:iewwpx:372

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Keywords: Liquidity; Financial markets; Monetary policy; Search;

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References

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  1. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  2. Díaz, Antonia & Perera-Tallo, Fernando, 2011. "Credit and inflation under borrowerʼs lack of commitment," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1888-1914, September.
  3. Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
  4. Aleksander Berentsen & Gabriele Camera & C hristopher W aller, 2005. "The Distribution Of Money Balances And The Nonneutrality Of Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 465-487, 05.
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  9. Marchesiani, Alessandro & Senesi, Pietro, 2009. "Money And Nominal Bonds," Macroeconomic Dynamics, Cambridge University Press, vol. 13(02), pages 189-199, April.
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  12. Akyol, Ahmet, 2004. "Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1245-1269, September.
  13. Fernando Perera-Tallo & Antonia Diaz, 2007. "Credit and Inflation under Borrowers' Lack of Commitment," 2007 Meeting Papers 429, Society for Economic Dynamics.
  14. Boel, Paola & Camera, Gabriele, 2006. "Efficient monetary allocations and the illiquidity of bonds," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1693-1715, October.
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  16. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  17. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "Money, Credit and Banking," IEW - Working Papers 219, Institute for Empirical Research in Economics - University of Zurich.
  18. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
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  22. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
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Citations

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Cited by:
  1. Aleksander Berentsen & Alessandro Marchesiani & Christopher J. Waller, 2013. "Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic," ECON - Working Papers 121, Department of Economics - University of Zurich, revised Sep 2013.
  2. Narayana R. Kocherlakota, 2007. "Money and bonds: an equivalence theorem," Staff Report 393, Federal Reserve Bank of Minneapolis.
  3. Aleksander Berentsen & Cyril Monnet, 2007. "Monetary Policy in a Channel System," CESifo Working Paper Series 1929, CESifo Group Munich.
  4. Fernando M. Martin, 2013. "Government Policy In Monetary Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(1), pages 185-217, 02.
  5. Fernando M. Martin, 2011. "Lagos-Wright vs. Cash-in-Advance: Government Policy Response to War-Expenditure Shocks," 2011 Meeting Papers 745, Society for Economic Dynamics.
  6. Fernando M. Martin, 2011. "Government policy response to war-expenditure shocks," Working Papers 2011-028, Federal Reserve Bank of St. Louis.
  7. Marchesiani, Alessandro & Senesi, Pietro, 2007. "Money and Nominal Bonds," MPRA Paper 9417, University Library of Munich, Germany.
  8. Fernando Martin, 2009. "On the Joint Determination of Fiscal and Monetary Policy," Discussion Papers dp09-01, Department of Economics, Simon Fraser University.
  9. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2012. "Degreasing the wheels of finance," ECON - Working Papers 101, Department of Economics - University of Zurich.
  10. Fernando M. Martin, 2013. "Debt, inflation and central bank independence," Working Papers 2013-017, Federal Reserve Bank of St. Louis.
  11. Aleksander Berentsen & Alessandro Marchesiani & Christopher J. Waller, 2010. "Channel systems: why is there a positive spread?," IEW - Working Papers 517, Institute for Empirical Research in Economics - University of Zurich.

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