Moneyspots: Extraneous Attributes and the Coexistence of Money and Interest-Bearing Nominal Bonds

Ricardo Lagos

Journal of Political Economy, 2013, vol. 121, issue 1, 127 - 185

Abstract: It is folklore among monetary theorists that, under laissez faire, without ad hoc assumptions that favor money over bonds, there do not exist equilibria in which government-issued fiat money coexists with nominal default-free, interest-bearing government bonds with similar physical characteristics. This proposition is the basis for the strongest version of the rate-of-return-dominance puzzle. In this paper I show that if--as has been the case throughout monetary history--the physical object used as fiat money is heterogeneous in an extraneous attribute, then there exist equilibria in which money coexists with interest-bearing bonds.

Date: 2013
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