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On the Local Interaction of Money and Credit

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  • Jin, Yi

    ()
    (University of Iowa)

  • Temzelides, Ted

    ()
    (University of Iowa)

Abstract

We study the emergence and coexistence of monetary and credit transactions in a model where exchange is decentralized. Agents belong to different villages which are informationally separated. The frequency of meetings between any two different villages decreases as their respective geographic distance from one another increases. The equilibrium mix of monetary and credit transactions is characterized as a function of the frequency of meetings among agents from different villages. Our economy may be interpreted as a medieval economy. Trade takes place only amoung a small set of nearby villages via the use of credit. Monetary trades emerge only after interactions with faraway villages become sufficiently frequent. Even in that case, trades among nearby villages remain non-monetized.

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File URL: http://www.biz.uiowa.edu/Faculty/ttemzelides/yi.PDF
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Bibliographic Info

Paper provided by University of Iowa, Department of Economics in its series Working Papers with number 99-05.

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Length: 22 pages
Date of creation: Oct 1998
Date of revision:
Handle: RePEc:uia:iowaec:99-05

Contact details of provider:
Postal: University of Iowa, Department of Economics, Henry B. Tippie College of Business, Iowa City, Iowa 52242
Phone: (319) 335-0829
Fax: (319) 335-1956
Web page: http://tippie.uiowa.edu/economics/
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References

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  1. Steve Williamson & Randall Wright, 1991. "Barter and monetary exchange under private information," Staff Report 141, Federal Reserve Bank of Minneapolis.
  2. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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  4. Camera, G. & Corbae, D., 1998. "Money and Price Dispersion," Working Papers 98-03, University of Iowa, Department of Economics.
  5. S. Rao Aiyagari & Stephen D. Williamson, 1999. "Credit in a Random Matching Model with Private Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 36-64, January.
  6. Harold L. Cole & Patrick J. Kehoe, 1994. "The role of institutions in reputation models of sovereign debt," Staff Report 179, Federal Reserve Bank of Minneapolis.
  7. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  8. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
  9. Kocherlakota, Narayana & Wallace, Neil, 1998. "Incomplete Record-Keeping and Optimal Payment Arrangements," Journal of Economic Theory, Elsevier, vol. 81(2), pages 272-289, August.
  10. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
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  13. Lim, Y. & Townsend, R.M., 1997. "General Equilibrium Models of Financial Systems: Theory and Measurement in Village Economies," Papers 9716, Centro de Estudios Monetarios Y Financieros-.
  14. Shouyong Shi, 1995. "Credit and Money in a Search Model with Divisible Commodities," Working Papers 917, Queen's University, Department of Economics.
  15. Melvyn Cole & Randall Wright, . "A Dynamic Equilibrium Model of Search, Bargaining, and Money," CARESS Working Papres 97-9, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  16. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  17. Francois R. Velde & Warren E. Weber & Randall Wright, . "A Model of Commodity Money, With Application to Gresham's Law and the Debasement Puzzle," CARESS Working Papres 97-7, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  18. Thomas J. Sargent & Francois R. Velde, 1997. "The big problem of small change," Working Paper Series, Macroeconomic Issues WP-97-08, Federal Reserve Bank of Chicago.
  19. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  20. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
  21. Diamond, Peter, 1990. "Pairwise Credit in Search Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 285-319, May.
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Cited by:
  1. Xavier Cuadras, 2005. "Circulation of Private Notes during a Currency Shortage," Working Papers 164, Barcelona Graduate School of Economics.
  2. Miquel Faig, 2004. "Divisible Money in an Economy with Villages," Econometric Society 2004 North American Summer Meetings 248, Econometric Society.
  3. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb.
  4. Peter Rupert & Martin Schindler & Andrei Shevchenko & Randall Wright, 2000. "The search-theoretic approach to monetary economics: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 10-28.
  5. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
  6. Huberto M. Ennis, 2006. "The problem of small change in early Argentina," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 93-111.

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