Essential Interest-Bearing Money (2008)

David Andolfatto ()

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

JEL-codes: E4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cta, nep-dge, nep-mac and nep-mon
Date: 2008-05-03
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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:8565

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