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.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics