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The Societal Benefits of Money and Interest Bearing Debt

Luis Araujo () and Leo Ferraris ()
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Luis Araujo: Michigan State University and Sao Paulo School of Economics-FGV
Leo Ferraris: DEF & CEIS,University of Rome "Tor Vergata", http://www.ceistorvergata.it

No 453, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: A long standing issue in monetary theory is whether money and interest bearing debt may both play a beneficial role in facilitating transactions. This paper identifies in the misallocation of liquidity a key element to provide an answer. In a search model of money, we show that there exists an equilibrium which resembles a liquidity trap, in which debt and money are used interchangeably to trade goods and debt carries no interest, and a Pareto superior equilibrium in which money is used to trade goods and interest bearing debt to reshuffle misallocated liquidity. Monetary policy has no effect in the liquidity trap, and a liquidity e¤ect in the Pareto superior equilibrium.

Keywords: Money; Debt; Bonds; Monetary Policy (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, nep-mac and nep-mon
Date: 2019-02-19, Revised 2019-02-19
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Persistent link: https://EconPapers.repec.org/RePEc:rtv:ceisrp:453

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