Societal benefits of illiquid bonds |
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Authors: | Narayana R Kocherlakota |
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Institution: | a Stanford University, Stanford, CA 94305, USA b Federal Reserve Bank of Minneapolis, Minneapolis, MN 55480, USA |
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Abstract: | In this paper, I provide a possible explanation of why nominally risk-free bonds are essential in monetary economies. I argue that the role of nominal bonds is to enable agents to engage in intertemporal exchanges of money. I show that bonds can only serve this role if they are illiquid (costly to exchange for goods). Finally, I argue that in economies in which nominal bonds are essential, it is optimal for monetary policy to respond to changes in the distribution of liquidity needs. |
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Keywords: | E40 E51 D82 |
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