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On the Coexistence of Money and Bonds

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  • David Andolfatto

Abstract

This paper re-examines the so-called coexistence puzzle in terms of a modified version of the legal restrictions hypothesis initially put forth by Bryant and Wallace (1980). The modification is in terms of dropping a questionable assumption in the original hypothesis; i.e., that large denomination government bonds cannot be intermediated by private banks. This restriction is replaced by one that is arguably more palatable; i.e., that the intermediated monetary instruments created by private banks are not universally acceptable as payment for all exchanges (unlike government money). The friction that gives rise to this latter restriction is one that is commonly employed in monetary models where fiat money is essential for exchange.
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  • David Andolfatto, 2005. "On the Coexistence of Money and Bonds," 2005 Meeting Papers 9, Society for Economic Dynamics.
    • Handle: RePEc:red:sed005:9
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    References listed on IDEAS

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    1. Gabriele Camera & Charles Noussair & Steven Tucker, 2003. "Rate-of-return dominance and efficiency in an experimental economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(3), pages 629-660, October.
    2. Rao Aiyagari, S. & Wallace, Neil & Wright, Randall, 1996. "Coexistence of money and interest-bearing securities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 397-419, June.
    3. Makinen, Gail E & Woodward, G Thomas, 1986. "Some Anecdotal Evidence Relating to the Legal Restrictions Theory of the Demand for Money," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 260-265, April.
    4. White, Lawrence H, 1987. "Accounting for Non-interest-Bearing Currency: A Critique of the Legal Restrictions Theory of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 448-456, November.
    5. John Bryant & Neil Wallace, 1980. "A suggestion for further simplifying the theory of money," Staff Report 62, Federal Reserve Bank of Minneapolis.
    6. Robert B. Litterman, 1982. "Optimal control of the money supply," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 6(Fall).
    7. Arthur J. Rolnick & Warren E. Weber, 1982. "Free banking, wildcat banking, and shinplasters," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 6(Fall).
    8. Andolfatto, David & Nosal, Ed, 2009. "Money, intermediation, and banking," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 289-294, April.
    9. Cowen, Tyler & Kroszner, Randall, 1989. "Scottish Banking before 1845: A Model for Laissez-Faire?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 221-231, May.
    10. Richard C.K.Burdekin & Marc D.Weidenmier, 2002. "Interest-Bearing Currency and Legal Restrictions Theory:Lessons from the Southern Confederacy," Cato Journal, Cato Journal, Cato Institute, vol. 22(2), pages 199-209, Fall.
    11. Bruce Smith, 2003. "Taking intermediation seriously," Proceedings, Federal Reserve Bank of Cleveland, pages 1319-1377.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Deep money, the coexistence puzzle, and the legal restrictions hypothesis
      by JP Koning in Moneyness on 2014-05-24 08:31:00

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    Cited by:

    1. Ricardo Lagos, 2010. "Moneyspots," 2010 Meeting Papers 498, Society for Economic Dynamics.
    2. Ferraris, Leo & Mattesini, Fabrizio, 2014. "Limited commitment and the legal restrictions theory of the demand for money," Journal of Economic Theory, Elsevier, vol. 151(C), pages 196-215.

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