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Credit Market Frictions and Coessentiality of Money and Credit

Author

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  • Ohik Kwon

    (Department of Economics, Korea University, Seoul, Republic of Korea)

  • Manjong Lee

    (Department of Economics, Korea University, Seoul, Republic of Korea)

Abstract

We explore how credit market frictions matter for the coessentiality of money and credit. There are high-productivity and low-productivity borrowers. Limited commitment can yield a one-for-one credit limit in accordance with a borrower's productivity. An adverse selection problem caused by asymmetric information, however, makes lenders impose the credit limit of a low-productivity borrower on a high-productivity borrower. If productivities differ su fficiently between borrowers, a high-productivity borrower is credit-constrained and is willing to hold money to compensate for the deficiency of her credit limit, but a low-productivity borrower is not. This eventually implies the coessentiality of money and credit in the sense that the use of both improves the allocation from a social welfare perspective.

Suggested Citation

  • Ohik Kwon & Manjong Lee, 2016. "Credit Market Frictions and Coessentiality of Money and Credit," Discussion Paper Series 1602, Institute of Economic Research, Korea University.
    • Handle: RePEc:iek:wpaper:1602
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    File URL: http://econ.korea.ac.kr/~ri/WorkingPapers/w1602.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    asymmetric information; adverse selection; cash; coessentiality; credit;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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