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On the complementarity of money and credit

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  • Ferraris, Leo

Abstract

I propose a model where agents choose to conduct their business using two payment instruments, money and bilateral credit. A friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit. Money and credit complement each other. With anticipated inflation, complementarity implies that the credit to money ratio decreases with inflation.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 54 (2010)
Issue (Month): 5 (July)
Pages: 733-741

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Handle: RePEc:eee:eecrev:v:54:y:2010:i:5:p:733-741

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Keywords: Coexistence of money and credit;

References

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  1. Orazio Attanasio & Luigi Guiso & Tuillo Jappelli, 1998. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Household Data," NBER Working Papers 6593, National Bureau of Economic Research, Inc.
  2. Shouyong Shi, 1995. "Credit and Money in a Search Model with Divisible Commodities," Working Papers 917, Queen's University, Department of Economics.
  3. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
  4. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
  5. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  6. Neil Wallace, 2000. "Knowledge of individual histories and optimal payment arrangements," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 11-21.
  7. Aliprantis, C. D. & Camera, G. & Puzzelo, D., 2004. "A Random Matching Theory," Purdue University Economics Working Papers 1168, Purdue University, Department of Economics.
  8. Makoto Watanabe & Leo Ferraris, 2007. "Collateral Secured Loans in a Monetary Economy," 2007 Meeting Papers 121, Society for Economic Dynamics.
  9. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
  10. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  11. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  12. Banerjee, Abhijit V & Maskin, Eric S, 1996. "A Walrasian Theory of Money and Barter," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 955-1005, November.
  13. Mei Dong, 2009. "Money and Costly Credit," 2009 Meeting Papers 404, Society for Economic Dynamics.
  14. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 97-115, February.
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Cited by:
  1. Mei Dong, 2009. "Money and Costly Credit," 2009 Meeting Papers 404, Society for Economic Dynamics.

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