Price Discrimination Analysis of Monetary Policy: An Extension

Abstract

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.