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Money and Credit Redux

Author

Listed:
  • Chao Gu

    () (University of Missouri-Columbia)

  • Fabrizio Mattesini
  • Randall Wright

Abstract

We analyze money and credit as competing payment instruments in decentralized exchange. In natural environments, we show the economy does not need both: if credit is easy, money is irrelevant; if credit is tight, money can be essential, but then credit is irrelevant. Changes in credit conditions are neutral because real balances respond endogenously to keep total liquidity constant. This is true for exogenous or endogenous policy and debt limits, secured or unsecured lending, and a general class of pricing mechanisms. While we show how to overturn some results, the benchmark model suggests credit might matter less than people think.

Suggested Citation

  • Chao Gu & Fabrizio Mattesini & Randall Wright, 2015. "Money and Credit Redux," Working Papers 1508, Department of Economics, University of Missouri.
  • Handle: RePEc:umc:wpaper:1508
    as

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    File URL: https://economics.missouri.edu/working-papers/2015/wp1508_gu.pdf
    File Function: First version, 2015
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    References listed on IDEAS

    as
    1. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-1344, December.
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    7. Francesca Carapella & Stephen Williamson, 2015. "Credit Markets, Limited Commitment, and Government Debt," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 963-990.
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    Citations

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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. Ohik Kwon & Manjong Lee, 2016. "Credit Market Frictions and Coessentiality of Money and Credit," Discussion Paper Series 1602, Institute of Economic Research, Korea University.
    3. Xavier Ragot & Florin O. Bilbiie, 2016. "Monetary Policy, Inflation, and Inequality: The Case for Helicopters," 2016 Meeting Papers 1663, Society for Economic Dynamics.
    4. 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.
    5. Francesca Carapella, 2017. "Credit markets, Limited commitment and Optimal monetary policy," 2017 Meeting Papers 1523, Society for Economic Dynamics.
    6. Wong, Tsz-Nga, 2016. "Monetary exchange and the irreducible cost of inflation," Journal of Economic Theory, Elsevier, vol. 164(C), pages 218-229.
    7. Mohammed Ait Lahcen & Pedro Gomis-Porqueras, 2018. "A model of endogenous financial inclusion: implications for inequality and monetary policy," ECON - Working Papers 310, Department of Economics - University of Zurich, revised Jul 2019.

    More about this item

    Keywords

    Money; Credit; Debt; Essentiality; Neutrality;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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