On the Societal Benefits of Illiquid Bonds

David Andolfatto ()

Working Paper series from Rimini Centre for Economic Analysis

Abstract: Kocherlakota (2003) presents an example of a monetary economy where efficiency is enhanced with the introduction of a nominally risk-free bond that is specifically designed to be illiquid. In his environment, an asset market involving swaps of money for bonds effects a socially desirable redistribution of purchasing power that might otherwise be replicated by a policy of type-contingent money transfers. In this paper, I recast Kocherlakota’s model in a fully dynamic quasilinear model and characterize optimal interventions when type-contingent transfers are feasible and when they are not. When they are not, an illiquid bond is essential. However, I also find that an illiquid bond may remain essential even when type-contingent transfers are feasible.

Date: 2009-01
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:13_09

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