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Coexistence of money and interest-bearing bonds

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  • van Buggenum, Hugo

Abstract

I construct a monetary model with agents that face idiosyncratic shocks to how they discount future utility. Once shocks are revealed, agents trade money for bonds in a financial market, then money for goods in a goods market, and finally move into the next time period. Away from the Friedman rule, money is scarce so that those who turn out to care little about the future, sell bonds at a discount to obtain money for immediate consumption—in the financial market, they reduce the savings value of their asset portfolio to obtain more liquid asset positions. This generates a net re-distribution of savings from agents that attach a low value to the future, to agents that attach a high value to the future. Ex-ante utility increases because losing savings when the future has low value, is dominated by receiving savings when the future has high value. The scarcity of money, however, leads to binding liquidity constraints in the goods market, which reduces ex-ante utility. The financial-market effect can dominate the goods-market effect, in which case the coexistence of money and interest-bearing bonds arises for an optimal policy.

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  • van Buggenum, Hugo, 2023. "Coexistence of money and interest-bearing bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:dyncon:v:153:y:2023:i:c:s0165188923000982
    DOI: 10.1016/j.jedc.2023.104692
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    1. van Buggenum, Hugo, 2023. "Coexistence of money and interest-bearing bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    2. Uras, Burak R. & van Buggenum, Hugo, 2022. "Preference heterogeneity and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).

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    More about this item

    Keywords

    New monetarism; Money and bonds; Liquidity; Financial markets;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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