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Essential interest-bearing money

  • Andolfatto, David

I examine optimal monetary policy in a Lagos and Wright [R. Lagos, R. Wright, A unified framework for monetary theory and policy analysis, J. Polit. Economy 113 (2005) 463-484] model where trade is centralized and all exchange is voluntary. I identify a class of incentive-feasible policies that improve welfare beyond what is achievable with zero intervention. Any policy in this class necessarily entails a non-negative inflation rate and a strictly positive nominal interest rate. Despite the absence of a lump-sum tax instrument, there exists an incentive-feasible policy that implements the first-best allocation.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 4 (July)
Pages: 1495-1507

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:4:p:1495-1507
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  1. 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.
  2. Harold L. Cole & Narayana R. Kocherlakota, 1998. "Zero nominal interest rates: why they're good and how to get them," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-10.
  3. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, David K. Levine.
  4. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper 0407, Federal Reserve Bank of Cleveland.
  5. David Andolfatto, 2007. "Incentives and the Limits to Deflationary Policy," Discussion Papers dp07-14, Department of Economics, Simon Fraser University.
  6. Shouyong Shi, 2006. "Welfare Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-212, University of Toronto, Department of Economics.
  7. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  8. Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, vol. 108(2), pages 179-193, February.
  9. 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.
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