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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.

Suggested Citation

  • 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. Chao Gu & Fabrizio Mattesini & Randall Wright, 2016. "Money and Credit Redux," Econometrica, Econometric Society, vol. 84, pages 1-32, January.
    3. Ohik Kwon & Manjong Lee, 2016. "Credit Market Frictions and Coessentiality of Money and Credit," Discussion Paper Series 1602, Institute of Economic Research, Korea University.
    4. Tai-Wei Hu & Luis Araujo, 2015. "Optimal Monetary Interventions in Credit Markets," 2015 Meeting Papers 176, Society for Economic Dynamics.
    5. 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.
    6. repec:eee:jetheo:v:175:y:2018:i:c:p:556-584 is not listed on IDEAS
    7. Lucy Qian Liu & Liang Wang & Randall Wright, 2015. "Costly Credit and Sticky Prices," Working Papers 201505, University of Hawaii at Manoa, Department of Economics.
    8. Chao Gu & Randall Wright, 2016. "Monetary Mechanisms," Working Papers 1601, Department of Economics, University of Missouri.
    9. Chao Gu & Fabrizio Mattesini & Randall Wright, 2015. "Money and Credit Redux," Working Papers 1508, Department of Economics, University of Missouri.

    More about this item

    Keywords

    Coexistence of money and credit; Costly record-keeping; Limited commitment;

    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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