The Societal Benefits of Outside versus Inside Bonds
We use a general equilibrium model of money to compare the use of `illiquid' government-issued bonds (outside bonds) versus credit (inside bonds) to alleviate buyers' liquidity constraints. We assume all transactions must be voluntary. This implies that the central bank cannot run deflation via lump-sum taxation and that agents must voluntarily redeem their outstanding private debt obligations. When the steady state outside bond to money ratio is taken as given, the allocation with inside bonds is more likely to dominate the allocation with inside bonds. When this ratio is also a policy choice, then the allocation with illiquid outside bonds dominates the inside bond allocation.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
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- Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
- Shouyong Shi, 2006.
"Welfare improvement from restricting the liquidity of nominal bonds,"
2006 Meeting Papers
245, Society for Economic Dynamics.
- Shouyong Shi, 2006. "Welfare Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-212, University of Toronto, Department of Economics.
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