Center for Economic Research, Department of Economics, University of Minnesota
Similar assets with significantly different rates-of-return are observed in
many financial markets. This is known as the rate of return paradox in monetary
theory, and is explained in this paper as an optimal response by the government
to an informational restriction. A general equilibrium model is constructed
with heterogeneous agents and a government that must finance an exogenously
determined, stationary deficit by issuing bonds or fiat currency. In addition
to explaining the paradox, the analysis accomplishes the following: (i) the
informational restriction helps justify the ruling out of lump sum taxation, and
(ii) the government's financing problem is shown to be formally equivalent to a
nonuniform pricing problem.
Villamil, A.P., (1985), "Price Discrimination Analysis of Monetary Policy: An Extension", Discussion Paper No. 222, Center for Economic Research, Department of Economics, University of Minnesota.
Villamil, Anne P..
Price Discrimination Analysis of Monetary Policy: An Extension.
Center for Economic Research, Department of Economics, University of Minnesota.
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