The Societal Benefits of Money and Interest Bearing Debt

Araujo LuisFerraris Leo
CEIS Research Paper
A long standing issue in monetary theory is whether money and interest bearing debt may both play a beneficial role in facilitating transactions. This paper identifies in the misallocation of liquidity a key element to provide an answer. In a search model of money, we show that there exists an equilibrium which resembles a liquidity trap, in which debt and money are used interchangeably to trade goods and debt carries no interest, and a Pareto superior equilibrium in which money is used to trade goods and interest bearing debt to reshuffle misallocated liquidity. Monetary policy has no effect in the liquidity trap, and a liquidity e¤ect in the Pareto superior equilibrium.

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Number: 453
Keywords: Money,Debt,Bonds,Monetary Policy
Volume: 17
Issue: 2
Date: Tuesday, February 19, 2019
Revision Date: Tuesday, February 19, 2019