The Inefficiency of Interest-bearing National Debt

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Abstract
The coexistence of money and default-free interest-bearing government bonds is explained by transaction costs; the private sector absorbs money with less real difficulty than it absorbs bonds. Under the assumption that the costs of issuing money and issuing bonds are identical, it follows that the presence of government bonds is inefficient. Further, the steady-state inflation rate is higher with bond financing of a given real deficit because there is less net output, less real saving, and hence the need for the government to inflate faster. This is demonstrated in a version of Samuelson's pure consumption-loans model.

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