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The Societal Benefits of Outside versus Inside Bonds

Author

Listed:
  • Christopher Waller

    (University of Notre Dame)

  • Aleksander Berentsen

    (University of Basel)

Abstract

We use a general equilibrium model of money to compare the use of `illiquid' government-issued bonds (outside bonds) versus credit (inside bonds) to alleviate buyers' liquidity constraints. We assume all transactions must be voluntary. This implies that the central bank cannot run deflation via lump-sum taxation and that agents must voluntarily redeem their outstanding private debt obligations. When the steady state outside bond to money ratio is taken as given, the allocation with inside bonds is more likely to dominate the allocation with inside bonds. When this ratio is also a policy choice, then the allocation with illiquid outside bonds dominates the inside bond allocation.

Suggested Citation

  • Christopher Waller & Aleksander Berentsen, 2007. "The Societal Benefits of Outside versus Inside Bonds," 2007 Meeting Papers 110, Society for Economic Dynamics.
  • Handle: RePEc:red:sed007:110
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    References listed on IDEAS

    as
    1. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-598, May.
    2. Shouyong Shi, 2006. "Welfare Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-212, University of Toronto, Department of Economics.
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    Cited by:

    1. Marchesiani, Alessandro & Senesi, Pietro, 2009. "Money And Nominal Bonds," Macroeconomic Dynamics, Cambridge University Press, vol. 13(2), pages 189-199, April.
    2. Narayana Kocherlakota, 2007. "Money and Credit: An Equivalence Result and Its Implications," 2007 Meeting Papers 115, Society for Economic Dynamics.

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