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Essential Interest-Bearing Money

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  • David Andolfatto

    (Simon Fraser University)

Abstract

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.

Suggested Citation

  • David Andolfatto, 2008. "Essential Interest-Bearing Money," EIEF Working Papers Series 0802, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2008.
  • Handle: RePEc:eie:wpaper:0802
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    References listed on IDEAS

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    1. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
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    3. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
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    7. 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.
    8. 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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    13. David Andolfatto, 2009. "On the Societal Benefits of Illiquid Bonds," Working Paper series 13_09, Rimini Centre for Economic Analysis.
    14. David Andolfatto, 2007. "Incentives and the Limits to Deflationary Policy," Discussion Papers dp07-14, Department of Economics, Simon Fraser University.
    15. Stephen Williamson & Daniel Sanches, 2008. "Money and Credit with Limited Commitment," 2008 Meeting Papers 502, Society for Economic Dynamics.
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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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