Welfare Improvement from Restricting the Liquidity of Nominal Bonds

Shouyong Shi

Working Papers from University of Toronto, Department of Economics

Abstract: In this paper I examine whether a society can improve welfare by imposing a legal restriction to forbid the use of nominal bonds as a means of payments for goods. To do so, I integrate a microfounded model of money with the framework of limited participation. While the asset market is Walrasian, the goods market is decentralized and the legal restriction is imposed only in a fraction of the trades. I show that the legal restriction can improve the society's welfare. In contrast to the literature, this essential role of the legal restriction persists even in the steady state and it does not rely on households' ability to trade unmatured bonds for money after observing the taste (or endowment) shocks.

Keywords: Nominal Bonds; Liquidity; Money; Efficiency. (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-03-07
New Economics Papers: this item is included in nep-dge, nep-fmk, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Welfare improvement from restricting the liquidity of nominal bonds (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:tor:tecipa:tecipa-212

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