On the Coexistence of Money and Bonds
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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