It is folklore among monetary theorists that, under laissez faire, absent ad-hoc assumptions that favor money over bonds, there do not exist equilibria in which government-issued fiat money coexists with nominal risk-free, interest-bearing government bonds with similar physical characteristics. This proposition is the basis for the strongest version of the rate-of-return-dominance puzzle. In this paper I show that if---as has been the case throughout monetary history---the physical object used as fiat money is heterogeneous in an extraneous attribute, then there exist equilibria in which money coexists with interest-bearing bonds.
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- Shi Shougong, 1995.
"Money and Prices: A Model of Search and Bargaining,"
Journal of Economic Theory,
Elsevier, vol. 67(2), pages 467-496, December.
- Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
- David Andolfatto, 2005.
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- 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.
- Zhu, Tao & Wallace, Neil, 2007. "Pairwise trade and coexistence of money and higher-return assets," Journal of Economic Theory, Elsevier, vol. 133(1), pages 524-535, March.
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