Wealth Distribution, Inflation Tax, and Societal Benefits of Illiquid Bonds

Young Sik Kim and Manjong Lee

Journal of Money, Credit and Banking, 2009, vol. 41, issue 5, 809-830

Abstract: Illiquid nominal government bonds are shown to have two opposing effects on welfare. First, the relatively poor choose to top‐up money balances for future consumption by purchasing nominal bonds at a discount. The wealth distribution becomes more centered with a smaller consumption deviation from the first best. Second, the higher inflation tax on monetary wealth to finance interest payments makes money less valuable, so that the quantity of output produced in exchange for money decreases. The trade‐off between the welfare‐enhancing effect on wealth distribution and the distortionary effect on output implies the socially optimal discount rate and liquidity.

Date: 2009
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https://doi.org/10.1111/j.1538-4616.2009.00234.x

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Journal Article: Wealth Distribution, Inflation Tax, and Societal Benefits of Illiquid Bonds (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:41:y:2009:i:5:p:809-830

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