Efficiency improvement from restricting the liquidity of nominal bonds

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In a monetary search model with nominal bonds, agents face matching/taste shocks but they cannot insure, borrow or trade against such shocks. A government imposes a legal restriction that prohibits bonds from being used to buy a subset of goods. I show that this legal restriction can increase the society's welfare. In contrast to the literature, this efficiency role persists in the steady state and even when the households cannot trade assets after receiving the shocks. Moreover, it can exist when the Friedman rule is available and when the restriction is only obeyed by government agents.

Original languageEnglish (US)
Pages (from-to)1025-1037
Number of pages13
JournalJournal of Monetary Economics
Issue number6
StatePublished - Sep 2008

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


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