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.
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- 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.
- Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
- Aleksander Berentsen & Gabriele Camera & Christopher Waller, .
"Money, Credit and Banking,"
IEW - Working Papers
219, Institute for Empirical Research in Economics - University of Zurich.
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