Moneyspots: Extraneous attributes and the coexistence of money and interest-bearing nominal bonds

Ricardo Lagos

    Research output: Contribution to journalArticle

    Abstract

    It is folklore among monetary theorists that, under laissez faire, without ad hoc assumptions that favor money over bonds, there do not exist equilibria in which government-issued fiat money coexists with nominal default-free, interest-bearing government bonds with similar physical characteristics. This proposition is the basis for the strongest version of the rate-of-return-dominance puzzle. In this paper I show that if-as has been the case throughout monetary history-the physical object used as fiat money is heterogeneous in an extraneous attribute, then there exist equilibria in which money coexists with interest-bearing bonds.

    Original languageEnglish (US)
    Pages (from-to)127-185
    Number of pages59
    JournalJournal of Political Economy
    Volume121
    Issue number1
    DOIs
    StatePublished - Feb 2013

    ASJC Scopus subject areas

    • Economics and Econometrics

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