Staff Report 51

A Price Discrimination Analysis of Monetary Policy

Neil Wallace
John Bryant

Revised April 1, 1983

Monetary policy is analyzed within a model that ignores transaction costs and appeals solely to legal restrictions on private intermediation to explain the coexistence of currency and interest-bearing default-free bonds. The interaction between such legal restrictions and monetary policy is illustrated in versions of overlapping generations models that contain three assets: government-issued currency and bonds and real capital. It is shown that legal restrictions and the use of both currency and bonds permit the government to levy a discriminatory inflation tax and that such a tax may be better in terms of the Pareto criterion than a uniform inflation tax.

Published In: Review of Economic Studies (Vol. 51, No. 2, April 1984, pp. 279-288)
Published In: The new classical macroeconomics (Vol. 2, 1992, pp. 430-439)

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