Wealth Distribution, Inflation Tax, and Societal Benefits of Illiquid Bonds

Abstract

Illiquid nominal government bonds are shown to have two opposing effects on welfare. First, the relatively poor choose to top-up money balances for future consumption by purchasing nominal bonds at a discount. The wealth distribution becomes more centered with a smaller consumption deviation from the first best. Second, the higher inflation tax on monetary wealth to finance interest payments makes money less valuable, so that the quantity of output produced in exchange for money decreases. The trade-off between the welfare-enhancing effect on wealth distribution and the distortionary effect on output implies the socially optimal discount rate and liquidity. Copyright (c) 2009 The Ohio State University.

A model of debit card as a means of payment

“…8 The value function is strictly increasing and strictly concave, and the wealth distribution has full support. The distribution resembles the one generated in a similar environment with a single asset such as Camera and Corbae (1999), Berentsen et al (2004), and Molico (2006), and with multiple assets such as Kim and Lee (2009). Now we first examine the effects of a decrease in record-keeping cost j on the overall use of a debit card as well as on payment patterns across agents with different wealth levels.…”