Efficiency Improvement from Restricting the Liquidity of Nominal Bonds

Shouyong Shi ()

Working Papers from University of Toronto, Department of Economics

Abstract: This paper addresses why it is beneficial for a society to restrict the use of nominal bonds as a means of payment for goods. The model has a centralized asset market and a decentralized goods market. Individuals face matching shocks that affect the marginal utility of consumption, but they cannot insure, borrow or trade assets against such risks. The government imposes a legal restriction to prohibit nominal bonds from being used as a means of payment in a subset of trades. I show that this partial legal restriction can improve the society's welfare. In contrast to the literature, the efficiency role of the restriction exists in the steady state and it does not require the households to be able to trade assets after receiving the shocks. Moreover, even when lump-sum taxes are available, the efficiency role continues to exist under a condition that induces optimal money growth to be above the Friedman rule.

Keywords: Nominal Bonds; Money; Efficiency; Return dominance (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Date: 2008-08-12
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Journal Article: Efficiency improvement from restricting the liquidity of nominal bonds (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:tor:tecipa:tecipa-329

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