Money and bonds: an equivalence theorem

Preprint OPEN
Narayana R. Kocherlakota (2007)
  • Subject: Money - Mathematical models ; Bonds

This paper considers four models in which immortal agents face idiosyncratic shocks and trade only a single risk-free asset over time. The four models specify this single asset to be private bonds, public bonds, public money, or private money respectively. I prove that, given an equilibrium in one of these economies, it is possible to pick the exogenous elements in the other three economies so that there is an outcome-equivalent equilibrium in each of them. (The term ?exogenous variables? refers to the limits on private issue of money or bonds, or the supplies of publicly issued bonds or money.)
  • References (17)
    17 references, page 1 of 2

    [1] Aiyagari, S. R., 1995. Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting. Journal of Political Economy 103, 1158-1175.

    [2] Aiyagari, S. R., McGrattan, E., 1998. The optimum quantity of debt. Journal of Monetary Economics 42, 447-469.

    [3] Barro, R., 1974, Are government bonds net wealth? Journal of Political Economy 82, 1095-1117.

    [4] Berentsen, A., Waller, C., 2006. The societal benefits of outside versus inside money. University of Notre Dame working paper. 5Aiyagari restricts attention to comparisons across steady states. Davila et al (2005) show that this restriction may lead to a misleading characterization of optimal taxes.

    [5] Cavalcanti, R., Wallace, N., 1999. A model of private bank note issue. Review of Economic Dynamics 2, 104-136.

    [6] Cole, H., Kocherlakota, N., 2001. Efficient allocations with hidden income and hidden storage. Review of Economic Studies 68, 523-541.

    [7] Davila, J., Hong, J., Krusell, P., Rios-Rull, V., 2005. Constrained efficiency in the neoclassical growth model with idiosyncratic shocks. University of Pennsylvania working paper.

    [8] Green, E., Zhou, R., 2005, Money as a mechanism in a Bewley economy. International Economic Review 46, 351-371.

    [9] Imrohoroglu, A., 1992. The welfare cost of inflation under imperfect insurance. Journal of Economic Dynamics and Control 16, 79-91.

    [10] Kocherlakota, N., forthcoming. Injecting rational bubbles. Journal of Economic Theory.

  • Metrics
    No metrics available
Share - Bookmark