Societal benefits of illiquid bonds

Abstract

In this paper, I provide a possible explanation of why nominally risk-free bonds are essential in monetary economies. I argue that the role of nominal bonds is to enable agents to engage in intertemporal exchanges of money. I show that bonds can only serve this role if they are illiquid (costly to exchange for goods). Finally, I argue that in economies in which nominal bonds are essential, it is optimal for monetary policy to respond to changes in the distribution of liquidity needs.

Central Bank Purchases of Government Bonds

“…Thus, we use i = 0:003 as a target to calibrate n. Furthermore, insights from experimental economics indicate that = 0:5 is a reasonable assumption in bilateral anonymous meetings. 22 Therefore, we stick to the value of = 0:5 used in the baseline calibration.…”

“…Derivation of (22). Since the short selling constraints (12) are not binding in a type-I equilibrium, it is obvious from (16) that (22) holds.…”

“…Otherwise, bonds would be perfect substitutes for money and thus be redundant. See Kocherlakota (2003), Andolfatto (2011), Berentsen and Waller (2011), or Berentsen et al (2014), for a more detailed discussion. 3 There is a rapidly growing literature which builds on the seminal contribution of Du¢ e et al (2005).…”

The Societal Benefits of a Financial Transaction Tax

“…The optimal taxation is calculated as follows. For each set of calibrated parameter values, we numerically search for the value of τ that maximizes ex-ante welfare, defined in (30). Furthermore, we calculate 1 − ∆, which is the percentage of total consumption that agents would be willing to give up in order to be in a steady state with τ = τ * , instead of τ = 0.…”

“…Furthermore, in Germany, the average inflation rate is nearly 1 percent lower, the real interest rate is 0.5 percent higher, and the manufacturing markup is 6 percent higher than in the U.S. Table 3 summarizes the calibration targets. As we did for the U.S., we calibrate the model to the targets presented in Table 3 and perform three robustness checks, where we use exactly the same targets as for the U.S. 30 Note that an average markup target of 30 percent, used in the calibration labeled "markup", is close to the number observed for Germany. 31 Table 4 shows the calibration results for Germany.…”