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

Ricardo Lagos

    Research output: Contribution to journalArticlepeer-review

    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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