Wealth distribution, inflation tax, and societal benefits of illiquid bonds

Young Sik Kim, Manjong Lee

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

Illiquid nominal government bonds are shown to have two opposing effects on welfare. First, the relatively poor choose to top-up money balances for future consumption by purchasing nominal bonds at a discount. The wealth distribution becomes more centered with a smaller consumption deviation from the first best. Second, the higher inflation tax on monetary wealth to finance interest payments makes money less valuable, so that the quantity of output produced in exchange for money decreases. The trade-off between the welfare-enhancing effect on wealth distribution and the distortionary effect on output implies the socially optimal discount rate and liquidity.

Original languageEnglish
Pages (from-to)809-830
Number of pages22
JournalJournal of Money, Credit and Banking
Volume41
Issue number5
DOIs
Publication statusPublished - 2009 Aug

Keywords

  • Coexistence
  • Fiat money
  • Illiquid bond
  • Matching model

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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