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Nominal Bonds And Interest Rates

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  • Shouyong Shi

Abstract

In this article, I integrate the microfoundation of monetary theory with the model of limited participation to analyze the competition between nominal bonds and money. The market for government nominal bonds is centralized and Walrasian, whereas the goods market is modeled as random matches. The government imposes a legal restriction that requires all government goods to be purchased with money but not with bonds. By contrast, private agents can exchange between themselves with both money and bonds. I show that an arbitrarily small legal restriction is sufficient to prevent matured bonds from being a medium of exchange. I also analyze the effects of monetary policy with and without the legal restriction. Some of those effects differ significantly from traditional monetary models. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Suggested Citation

  • 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, May.
  • Handle: RePEc:ier:iecrev:v:46:y:2005:i:2:p:579-612
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    Cited by:

    1. Shi, Shouyong, 2008. "Efficiency improvement from restricting the liquidity of nominal bonds," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1025-1037, September.
    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. Lagos, Ricardo, 2010. "Asset prices and liquidity in an exchange economy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 913-930, November.
    4. Dror Goldberg, 2012. "The tax-foundation theory of fiat money," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 489-497, June.
    5. Ricardo Lagos, 2010. "Moneyspots," 2010 Meeting Papers 498, Society for Economic Dynamics.
    6. Martin, Antoine & Monnet, Cyril, 2011. "Monetary Policy Implementation Frameworks: A Comparative Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S1), pages 145-189, April.
    7. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb.
    8. Shouyong Shi, 2014. "Liquidity, Interest Rates and Output," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 993-1036, November.
    9. Kim, Young Sik & Lee, Manjong, 2012. "Intermediary cost and coexistence puzzle," Economics Letters, Elsevier, vol. 117(1), pages 142-145.
    10. Johnson, Christopher, 2016. "Differences of Opinion, Liquidity, and Monetary Policy," MPRA Paper 70951, University Library of Munich, Germany.
    11. Aleksander Berentsen & Christopher Waller, 2008. "Outside Versus Inside Bonds," IEW - Working Papers 372, Institute for Empirical Research in Economics - University of Zurich.
    12. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.
    13. Shouyong Shi, 2006. "Welfare Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-212, University of Toronto, Department of Economics.

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