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Nominal Bonds and Interest Rates: The Case of One-Period Bonds

  • Shouyong Shi

This paper is the first step in the integration of the (search-theoretic) microfoundation of monetary theory into the fruitful analysis by Lucas (1990). I construct two search models, in which fiat money coexists in equilibrium with default-free nominal bonds issued by the government, and then use the models to analyze the effects of money growth and open market operations. In the first model, matured bonds circulate in the goods market as perfect substitutes for money and there are a continuum of stationary equilibria of this sort. In the second model, matured bonds do not circulate in the goods market and there is a unique stationary equilibrium. In both models, newly issued bonds are sold at a discount for money and thus they bear positive interest. The effects of monetary policies differ in these two economies.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-SHOUYONG-03-03.pdf
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number shouyong-03-03.

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Length: 28 pages
Date of creation: 11 Jul 2002
Date of revision:
Handle: RePEc:tor:tecipa:shouyong-03-03
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  1. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  2. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  3. Shi, Shouyong, 1999. "Search, inflation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 81-103, August.
  4. Shouyong Shi, 1995. "Credit and Money in a Search Model with Divisible Commodities," Working Papers 917, Queen's University, Department of Economics.
  5. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
  6. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  7. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June.
  8. Shouyong Shi, 2001. "Liquidity, Bargaining, and Multiple Equilibria in a Search Monetary Model," Annals of Economics and Finance, Society for AEF, vol. 2(2), pages 325-351, November.
  9. 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.
  10. Edward J. Green & Ruilin Zhou, . ""A Rudimentary Model of Search with Divisible Money and Prices''," CARESS Working Papres 95-17, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  11. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
  12. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
  13. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
  14. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  15. Wallace, Neil, 2001. "Whither Monetary Economics?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 847-69, November.
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