Premium
Wealth Distribution, Inflation Tax, and Societal Benefits of Illiquid Bonds
Author(s) -
KIM YOUNG SIK,
LEE MANJONG
Publication year - 2009
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2009.00234.x
Subject(s) - economics , bond , monetary economics , consumption (sociology) , market liquidity , inflation (cosmology) , welfare , distribution (mathematics) , consumption tax , indirect tax , tax reform , finance , public economics , market economy , mathematical analysis , social science , physics , mathematics , sociology , theoretical physics
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.