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Money and credit as means of payment: A new monetarist approach

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  • Lotz, Sébastien
  • Zhang, Cathy

Abstract

We study the choice of payment instruments in a model with money and credit, where sellers must invest in a record-keeping technology to accept credit and buyers have limited commitment. Our model captures the two-sided market interaction between consumers and retailers that can generate multiple equilibria. Limited commitment yields an endogenous debt limit that depends on monetary policy. Money and credit coexist for a range of parameters, and bargaining related hold-up problems can lead to inefficiencies in the adoption of monitoring technologies. Changes in monetary policy generate multiplier effects in the credit market due to complementarities between consumer borrowing and the adoption of credit by merchants.

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  • Lotz, Sébastien & Zhang, Cathy, 2016. "Money and credit as means of payment: A new monetarist approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 68-100.
    • Handle: RePEc:eee:jetheo:v:164:y:2016:i:c:p:68-100
    DOI: 10.1016/j.jet.2015.08.003
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    Cited by:

    1. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    2. Gomis-Porqueras Pedro & Sun Ching-Jen, 2020. "Fiat Money as a Public Signal, Medium of Exchange, and Punishment," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 20(2), pages 1-11, June.
    3. Araujo, Luis & Hu, Tai-Wei, 2018. "Optimal monetary interventions in credit markets," Journal of Economic Theory, Elsevier, vol. 178(C), pages 455-487.
    4. Françoise Vasselin, 2018. "The Competition Between Cash and Mobile Payments in Markets with Mobile Partnerships A Monetary Search Model Point of View," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01722404, HAL.
    5. Bethune, Zachary & Hu, Tai-Wei & Rocheteau, Guillaume, 2018. "Indeterminacy in credit economies," Journal of Economic Theory, Elsevier, vol. 175(C), pages 556-584.
    6. Mei Dong & Stella Huangfu, 2021. "Money and Costly Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(6), pages 1449-1478, September.
    7. Liang Wang & Randall Wright & Lucy Qian Liu, 2020. "Sticky Prices And Costly Credit," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 37-70, February.
    8. Lucy Qian Liu & Liang Wang & Randall Wright, 2015. "Costly Credit and Sticky Prices," Working Papers 201505, University of Hawaii at Manoa, Department of Economics.
    9. Janet Hua Jiang & Enchuan Shao, 2020. "The Cash Paradox," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 177-197, April.
    10. Gu, Chao & Wright, Randall, 2016. "Monetary mechanisms," Journal of Economic Theory, Elsevier, vol. 163(C), pages 644-657.
    11. Chao Gu & Fabrizio Mattesini & Randall Wright, 2016. "Money and Credit Redux," Econometrica, Econometric Society, vol. 84, pages 1-32, January.
    12. Mohammed Ait Lahcen & Pedro Gomis‐Porqueras, 2021. "A Model of Endogenous Financial Inclusion: Implications for Inequality and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 1175-1209, August.
    13. Eswar Prasad, 2020. "New and evolving financial technologies implications for monetary policy and financial stability in Latin America," Documentos de trabajo 019463, Documentos de Discusión FLAR.
    14. Ohik Kwon & Manjong Lee, 2016. "Credit Market Frictions and Coessentiality of Money and Credit," Discussion Paper Series 1602, Institute of Economic Research, Korea University.
    15. Sébastien Lotz & Françoise Vasselin, 2019. "A New Monetarist Model Of Fiat And E‐Money," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 498-514, January.
    16. Carli, Francesco & Gomis-Porqueras, Pedro, 2021. "Real consequences of open market operations: The role of limited commitment," European Economic Review, Elsevier, vol. 132(C).
    17. Baughman, Garth & Rabinovich, Stanislav, 2021. "Capacity choice, monetary trade, and the cost of inflation," European Economic Review, Elsevier, vol. 134(C).
    18. 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.
    19. Choi, Hyung Sun, 2019. "Money, debit card, gross-settlement risk, and central banking," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    20. Guillaume Rocheteau & Tsz-Nga Wong & Cathy Zhang, 2018. "Lending Relationships and Optimal Monetary Policy," Purdue University Economics Working Papers 1306, Purdue University, Department of Economics.
    21. Paola Boel & Christopher J. Waller, 2020. "On the Essentiality of Credit and Banking at the Friedman Rule," Working Papers 2020-018, Federal Reserve Bank of St. Louis.
    22. Françoise Vasselin, 2018. "The Competition Between Cash and Mobile Payments in Markets with Mobile Partnerships A Monetary Search Model Point of View," Working Papers hal-01722404, HAL.
    23. Luis Araujo & Leo Ferraris, 2019. "The Societal Benefits of Money and Interest Bearing Debt," CEIS Research Paper 453, Tor Vergata University, CEIS, revised 19 Feb 2019.
    24. Heon Lee, 2021. "Money Creation and Banking: Theory and Evidence," Papers 2109.15096, arXiv.org.

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    More about this item

    Keywords

    Coexistence of money and credit; Costly record-keeping; Limited commitment;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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