Monetary policy is analysed within a model that appeals 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 a version of the overlapping generations model. The model shows that legal restrictions and the use of both currency and bonds permit the government to levy a nonlinear inflation tax and that such a tax may be better in terms of the Pareto criterion than a linear inflation tax.

We prove the general existence of steady states with positive consumption in an N goods and fiat money version of the Kiyotaki-Wright model by admitting mixed strategies. We also show that there always exists a steady state in which everyone accepts a least costly-to-store object. In particular, if fiat money is one such object, then there always exists a monetary steady state. We also establish some other properties of steady states and comment on the relationship between steady states and (incentive) feasible allocations.