Andolfatto, David (2008): Essential Interest-Bearing Money (2008).
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I consider a model of intertemporal trade where agents lack commitment, agent types are private information, there is an absence of recordkeeping, and societal penalties are infeasible. Despite these frictions, I demonstrate that policy can be designed to implement the first-best allocation as a (stationary) competitive monetary equilibrium. The optimal policy requires a strictly positive interest rate with the aggregate interest expenditure financed in part by an inflation tax and in part by an incentive-compatible lump-sum fee. An illiquid bond is essential only in the event that paying interest on money is prohibitively costly.
|Item Type:||MPRA Paper|
|Original Title:||Essential Interest-Bearing Money (2008)|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates|
|Depositing User:||David Andolfatto|
|Date Deposited:||03. May 2008 18:24|
|Last Modified:||16. Feb 2013 11:23|
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