Welfare improvement from restricting the liquidity of nominal bonds

Shouyong Shi

No 245, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper I examine whether a society can improve welfare by imposing a legal restriction to forbid the use of nominal bonds as a means of payments for goods. To do so, I integrate a microfounded model of money with the framework of limited participation. While the asset market is Walrasian, the goods market is decentralized and the legal restriction is imposed only in a fraction of the trades. I show that the legal restriction can improve the society's welfare. This essential role of the legal restriction persists even in the steady state, in contrast to the one-period role established in the literature. Also in contrast to the literature, the essential role of the legal restriction does not rely on households' ability to trade unmatured bonds for money after observing the taste (or endowment) shocks. Thus, the role cannot be mimicked or replaced with other policies such as discount windows

Keywords: Nominal bonds; search; money; efficiency (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Welfare Improvement from Restricting the Liquidity of Nominal Bonds (2006)
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