Ongoing Relations, Money and Credit
A model which explains, at a primitive level, the coexistence of money and credit, even though buyers prefer credit, an which allows the study of the interaction of money and credit is introduced. This is done in a setting with ongoing relations between sellers and untrustworthy buyers in which the choice of the medium of exchange is endogenous. The introduction of money results in less credit availability but helps to overcome the trading frictions so that the volume of trade increases. It is possible for there to be a monetary equilibrium which is Pareto dominated by the nonmonetary equilibrium.
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