Money and Nominal Bonds

Abstract

This paper studies an economy with ex post heterogeneity and nominal bonds in a modelà la Lagos and Wright (2005). It is shown that a strictly positive interest rate is a sufficient condition for the allocation with nominal bonds to be welfare-improving. This result comes from protection against the inflation tax.

Outside versus Inside Bonds

“…Since agents have different discount factors and trading opportunities, for some parameter configurations, there is a welfare improving role for illiquid bonds under the optimal monetary policy. Marchesiani and Senesi (2007) consider an economy where agents with idle money holdings can buy illiquid outside bonds. The government finances the interest payment through lump-sum taxes.…”

Moneyspots: Extraneous Attributes and the Coexistence of Money and Interest-Bearing Nominal Bonds

“…After all, it is some well-run window of this sort what presumably keeps the exchange rate between one-dollar notes and ten-dollar notes fixed at ten-to-one. 20 The answer is that even if the government in the model was ready to swap a note for another on demand, the moneyspot equilibria of Proposition 2 would still exist. The reason is that beliefs can be specified as in the proof of the proposition, so that any newly injected note (through window swaps, or bond redemptions) would be deemed of type 1, and in any equilibrium in which these expectations are validated, the window would merely be swapping a note whose serial number belongs to the set of serial numbers of type 1, for another note with a serial number in the same set.…”

“…21 There have been instances in which money remained in circulation along with interestbearing, small-denomination, payable-to-the-bearer bonds issued by a government with the authority to print or tax the money needed to redeem those bonds. 22 In light of impossibility results similar to Proposition 1, these instances have been regarded as puzzling-they embody 20 Absent a well-functioning window, not even the fixed-exchange-rate regime among different denominations of a single currency can be taken for granted in monetary economies. For example, over the last couple of years in Argentina, coins have been privately trading at prices that exceed their face values against higher-denomination notes.…”

Intermediary cost and coexistence puzzle

“…2 Among recent related works using search-theoretic models of money are Aiyagari et al (1996), Shi (2005), Boel and Camera (2006), Zhu and Wallace (2007), Berentsen and Waller (2008), Marchesiani and Senesi (2009), and Lagos (2010).…”