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The Limits of ONETARY ECONOMICS: On Money as a Constraint on Market Power

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  • Ricardo Lagos
  • Shengxing Zhang

Abstract

We formulate a generalization of the traditional medium‐of‐exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions with money strengthens the stance of sellers of goods and services in relation to intermediaries, and show this mechanism is operative even for sellers who never exercise the option to sell for money. These latent money demand considerations imply that in general, in contrast to current conventional wisdom in policy‐oriented research in monetary economics, monetary policy can remain effective through medium‐of‐exchange transmission channels—even in highly developed credit economies where the share of monetary transactions is negligible.

Suggested Citation

  • Ricardo Lagos & Shengxing Zhang, 2022. "The Limits of ONETARY ECONOMICS: On Money as a Constraint on Market Power," Econometrica, Econometric Society, vol. 90(3), pages 1177-1204, May.
    • Handle: RePEc:wly:emetrp:v:90:y:2022:i:3:p:1177-1204
    DOI: 10.3982/ECTA17319
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    References listed on IDEAS

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    Cited by:

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    2. Jiang, Janet Hua & Puzzello, Daniela & Zhang, Cathy, 2023. "Inflation, Output, and Welfare in the Laboratory," European Economic Review, Elsevier, vol. 152(C).
    3. Miroslav Gabrovski & Athanasios Geromichalos & Lucas Herrenbrueck & Ioannis Kospentaris & Sukjoon Lee, 2023. "The real effects of financial disruptions in a monetary economy," Working Papers 2301, VCU School of Business, Department of Economics.

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