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Money and Credit: Theory and Applications

Author

Listed:
  • Liang Wang
  • Randall Wright
  • Lucy Qian Liu

Abstract

We develop a theory of money and credit as competing payment instruments, then put it to work in applications. Buyers can use cash or credit, with the former (latter) subject to the inflation tax (transaction costs). Frictions that make the choice of payment method interesting also imply equilibrium price dispersion. We deliver closed-form solutions for money demand. We then show the model can simultaneously account for the price-change facts, cash-credit shares in micro payment data, and money-interest correlations in macro data. We analyze the effects of inflation on welfare, price dispersion and markups. We also describe nonstationary equilibria as self-fulfilling prophecies, which is standard, except here it entails dynamics in the price distribution.

Suggested Citation

  • Liang Wang & Randall Wright & Lucy Qian Liu, 2017. "Money and Credit: Theory and Applications," IMF Working Papers 2017/014, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/014
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    Cited by:

    1. Burdett, Kenneth & Menzio, Guido, 2017. "The (Q,S,s) pricing rule: a quantitative analysis," Research in Economics, Elsevier, vol. 71(4), pages 784-797.
    2. Baughman, Garth & Rabinovich, Stanislav, 2019. "Self-confirming price dispersion in monetary economies," Journal of Economic Theory, Elsevier, vol. 183(C), pages 284-311.
    3. Han Han & Benoit Julien & Asgerdur Petursdottir & Liang Wang, 2017. "Asset Pricing Equilibria with Indivisible Goods," Working Papers 201705, University of Hawaii at Manoa, Department of Economics.
    4. Wang, Zhu & Wolman, Alexander L., 2016. "Payment choice and currency use: Insights from two billion retail transactions," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 94-115.
    5. Liu, Tao & Lu, Dong & Woo, Wing Thye, 2019. "Trade, finance and international currency," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 374-413.

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