Coexistence of Money and Interest-Bearing Bonds

CentER Discussion Paper Series Nr. 2021-019

78 Pages Posted: 22 Jul 2021

See all articles by Hugo van Buggenum

Hugo van Buggenum

Tilburg University - Tilburg University School of Economics and Management

Date Written: July 19, 2021

Abstract

This paper revisits how coexistence of money and bonds can make a society better off. For this purpose, a model is constructed in which payment instruments matter for settling real transactions and savings instruments matter because agents differ in how they discount future utility. Because bonds and money differ in their characteristics as payment and savings instruments, the model is able to explain the coexistence puzzle for an optimally chosen monetary policy. Such a policy trades-offs efficiency in financial markets, in which money is traded for bonds, with efficiency in goods markets, in which money is traded for a real good. Financial markets can achieve a better distribution of savings when agents are constrained by their money holdings, but this is bad for efficiency in goods markets. The former effect can dominate the latter so that optimal policy deviates from the Friedman rule.

Keywords: new monetarism, coexistence puzzle, liquidity, financial markets

JEL Classification: E40, E44, E50, E52, E62, G12

Suggested Citation

van Buggenum, Hugo, Coexistence of Money and Interest-Bearing Bonds (July 19, 2021). CentER Discussion Paper Series Nr. 2021-019, Available at SSRN: https://ssrn.com/abstract=3889455 or http://dx.doi.org/10.2139/ssrn.3889455

Hugo Van Buggenum (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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