Welfare improvement from restricting the liquidity of nominal bonds
In this paper I examine whether a society can improve welfare by imposing a legal restriction to forbid the use of nominal bonds as a means of payments for goods. To do so, I integrate a microfounded model of money with the framework of limited participation. While the asset market is Walrasian, the goods market is decentralized and the legal restriction is imposed only in a fraction of the trades. I show that the legal restriction can improve the society's welfare. This essential role of the legal restriction persists even in the steady state, in contrast to the one-period role established in the literature. Also in contrast to the literature, the essential role of the legal restriction does not rely on households' ability to trade unmatured bonds for money after observing the taste (or endowment) shocks. Thus, the role cannot be mimicked or replaced with other policies such as discount windows
|Date of creation:||03 Dec 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Miquel Faig, 2004.
"Divisible Money in an Economy with Villages,"
Econometric Society 2004 North American Summer Meetings
248, Econometric Society.
- Boel, Paola & Camera, Gabriele, 2006.
"Efficient monetary allocations and the illiquidity of bonds,"
Journal of Monetary Economics,
Elsevier, vol. 53(7), pages 1693-1715, October.
- Boel, Paola & Camera, Gabriele, 2004. "Efficient Monetary Allocations and the Illiquidity of Bonds," Purdue University Economics Working Papers 1171, Purdue University, Department of Economics.
- Neil Wallace, 1983. "A legal restrictions theory of the demand for "money" and the role of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
- S. Rao Aiyagari & Neil Wallace & Randall Wright, 1996.
"Coexistence of money and interest-bearing securities,"
550, Federal Reserve Bank of Minneapolis.
- 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.
- Stephen D. Williamson, 2005.
"Monetary Policy and Distribution,"
2005 Meeting Papers
379, Society for Economic Dynamics.
- Shouyong Shi, 1996.
"A Divisible Search Model of Fiat Money,"
930, Queen's University, Department of Economics.
- Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
- Shouyong Shi, 2005. "Nominal Bonds And Interest Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 579-612, 05.
- Hicks, J. R., 1975. "Value and Capital: An Inquiry into some Fundamental Principles of Economic Theory," OUP Catalogue, Oxford University Press, edition 2, number 9780198282693, March.
When requesting a correction, please mention this item's handle: RePEc:red:sed006:245. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.