Societal benefits of nominal bonds

Narayana Kocherlakota

No 275, Staff Report from Federal Reserve Bank of Minneapolis

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 serve as record-keeping devices 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 show that in economies in which nominal bonds are essential, welfare and nominal interest rates are both positively associated with the supply of illiquid bonds (if that supply is small).

Keywords: Bonds; Money (search for similar items in EconPapers)
Date: 2000
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