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Essential interest-bearing money

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  • David Andolfatto

Abstract

I examine optimal monetary policy in a Lagos and Wright [A unified framework for monetary theory and policy analysis, J. Polit. Econ. 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.

Suggested Citation

  • David Andolfatto, 2009. "Essential interest-bearing money," Working Papers 2009-044, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2009-044
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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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    More about this item

    Keywords

    Money theory; Econometric models;

    JEL classification:

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

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