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Efficiency improvement from restricting the liquidity of nominal bonds

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  • Shi, Shouyong

Abstract

In a monetary search model with nominal bonds, agents face matching/taste shocks but they cannot insure, borrow or trade against such shocks. A government imposes a legal restriction that prohibits bonds from being used to buy a subset of goods. I show that this legal restriction can increase the society's welfare. In contrast to the literature, this efficiency role persists in the steady state and even when the households cannot trade assets after receiving the shocks. Moreover, it can exist when the Friedman rule is available and when the restriction is only obeyed by government agents.

Suggested Citation

  • Shi, Shouyong, 2008. "Efficiency improvement from restricting the liquidity of nominal bonds," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1025-1037, September.
  • Handle: RePEc:eee:moneco:v:55:y:2008:i:6:p:1025-1037
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    1. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
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    Cited by:

    1. Andolfatto, David & Martin, Fernando M. & Zhang, Shengxing, 2017. "Rehypothecation and liquidity," European Economic Review, Elsevier, vol. 100(C), pages 488-505.
    2. Berentsen, Aleksander & Waller, Christopher, 2011. "Outside versus inside bonds: A ModiglianiâMiller type result for liquidity constrained economies," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1852-1887, September.
    3. Aleksander Berentsen & Alessandro Marchesiani & Christopher Waller, 2014. "Floor Systems for Implementing Monetary Policy: Some Unpleasant Fiscal Arithmetic," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 523-542, July.
    4. David Andolfatto, 2009. "On the Societal Benefits of Illiquid Bonds," Working Paper series 13_09, Rimini Centre for Economic Analysis.
    5. repec:eee:dyncon:v:79:y:2017:i:c:p:184-200 is not listed on IDEAS
    6. Hu, Tai-Wei & Rocheteau, Guillaume, 2013. "On the coexistence of money and higher-return assets and its social role," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2520-2560.
    7. Huber, Samuel & Kim, Jaehong, 2017. "On the optimal quantity of liquid bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 184-200.
    8. Waller, Christopher J., 2015. "Microfoundations of Money: Why They Matter," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 289-301.
    9. Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2012. "Liquidity and the Threat of Fraudulent Assets," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 000.
    10. 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.
    11. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2014. "Degreasing The Wheels Of Finance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 735-763, August.
    12. Mahmoudi, Babak, 2013. "Open-Market Operations, Asset Distributions, and Endogenous Market Segmentation," MPRA Paper 50089, University Library of Munich, Germany.
    13. Mahmoudi, Babak, 2013. "Liquidity Effects of Central Banks' Asset Purchase Programs," MPRA Paper 49424, University Library of Munich, Germany.

    More about this item

    Keywords

    Bonds Money Efficiency Return dominance;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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