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Nominal Bonds and Interest Rates: The Case of One-Period Bonds

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  • Shouyong Shi

Abstract

This paper is the first step in the integration of the (search-theoretic) microfoundation of monetary theory into the fruitful analysis by Lucas (1990). I construct two search models, in which fiat money coexists in equilibrium with default-free nominal bonds issued by the government, and then use the models to analyze the effects of money growth and open market operations. In the first model, matured bonds circulate in the goods market as perfect substitutes for money and there are a continuum of stationary equilibria of this sort. In the second model, matured bonds do not circulate in the goods market and there is a unique stationary equilibrium. In both models, newly issued bonds are sold at a discount for money and thus they bear positive interest. The effects of monetary policies differ in these two economies.

Suggested Citation

  • Shouyong Shi, 2002. "Nominal Bonds and Interest Rates: The Case of One-Period Bonds," Working Papers shouyong-03-03, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:shouyong-03-03
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    References listed on IDEAS

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    Cited by:

    1. Shouyong Shi, 2014. "Liquidity, Interest Rates and Output," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 53-95, May.

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    Keywords

    Search; Money; Bonds; Interest Rates.;
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