Working Paper 550

Coexistence of Money and Interest-Bearing Securities

Neil Wallace
Randall Wright | Consultant
S. Rao Aiyagari

Revised April 1, 1996

Abstract
A random matching model with money is used to study the nominal yield on small denomination, bearer, safe, discount securities issued by the government. There is always one steady state with matured securities circulating at par and, for some parameters, another with them circulating at a discount. In the former, a necessary and sufficient condition for a positive nominal yield on not-yet-matured securities is exogenous discriminatory treatment of them by the government. In the latter, the post-maturity discount on securities induces a deeper pre-maturity discount even without such discriminatory treatment.



Published In: Journal of Monetary Economics (Vol. 37, No. 3, June 1996, pp. 397-419)

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