Essential Interest-Bearing Money
I examine a version of the Lagos and Wright (2005) monetary model where coercive lump-sum taxation is infeasible. Despite this restriction, I demonstrate that the first-best allocation remains implementable under an appropriately designed monetary policy; at least, if agents are sufficiently patient. The main conclusion is that any incentive-feasible monetary policy necessarily requires a strictly positive nominal interest rate to be paid on money balances.
|Date of creation:||2008|
|Date of revision:||Oct 2008|
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