The Societal Benefits of Money and Interest Bearing Debt

32 Pages Posted: 19 Feb 2019

See all articles by Luis F. Araujo

Luis F. Araujo

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics; Michigan State University - Department of Economics

Leo Ferraris

Charles III University of Madrid

Date Written: February 6, 2019

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 effect in the Pareto superior equilibrium.

Keywords: Money, Debt, Bonds, Monetary Policy

JEL Classification: E40

Suggested Citation

Araujo, Luis Fernando and Ferraris, Leo, The Societal Benefits of Money and Interest Bearing Debt (February 6, 2019). CEIS Working Paper No. 453, Available at SSRN: https://ssrn.com/abstract=3337676 or http://dx.doi.org/10.2139/ssrn.3337676

Luis Fernando Araujo

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

Michigan State University - Department of Economics ( email )

101 Marshall Hall
East Lansing, MI 48824
United States
517-432-1068 (Fax)

Leo Ferraris (Contact Author)

Charles III University of Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

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