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Essential interest-bearing money

Author

Listed:
  • 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
    DOI: 10.20955/wp.2009.044
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    JEL classification:

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

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