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On the Local Interaction of Money and Credit

  • Y. Jin

    (Univ. of Iowa)

  • T. Temzelides

    (University of Iowa)

We study the emergence and coexistence of monetary and credit transactions in a model where exchange is decentralized. Agents belong to different villages which are informationally separated. The frequency of meetings between any two different villages decreases as their respective geographic distance from one another increases. The equilibrium mix of monetary and credit transactions is characterized as a function of the frequency of meetings among agents from different villages. Our economy may be interpreted as a medieval economy. Trade takes place only among a small set of nearby villages via the use of credit. Monetary trades emerge only after interactions with faraway villages become sufficiently frequent. Even in that case, trades among nearby villages remain non-monetized.

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Paper provided by EconWPA in its series Macroeconomics with number 9905001.

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Length: 21 pages
Date of creation: 06 May 1999
Date of revision:
Handle: RePEc:wpa:wuwpma:9905001
Note: 21 pages, Tex file
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Shouyong Shi, 1995. "Credit and Money in a Search Model with Divisible Commodities," Working Papers 917, Queen's University, Department of Economics.
  2. François R. Velde & Warren E. Weber & Randall Wright, 1999. "A Model of Commodity Money, with Applications to Gresham's Law and the Debasement Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 291-323, January.
  3. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
  4. Camera, G. & Corbae, D., 1998. "Money and Price Dispersion," Working Papers 98-03, University of Iowa, Department of Economics.
  5. Thomas J. Sargent & Francois R. Velde, 1997. "The big problem of small change," Working Paper Series, Macroeconomic Issues WP-97-08, Federal Reserve Bank of Chicago.
  6. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-71, September.
  7. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  8. Harold L. Cole & Patrick J. Kehoe, 1994. "The role of institutions in reputation models of sovereign debt," Staff Report 179, Federal Reserve Bank of Minneapolis.
  9. Williamson, Steve & Wright, Randall, 1994. "Barter and Monetary Exchange under Private Information," American Economic Review, American Economic Association, vol. 84(1), pages 104-23, March.
  10. Peter Diamond, 1990. "Pairwise Credit in Search Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 285-319.
  11. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
  12. Melvyn Cole & Randall Wright, . "A Dynamic Equilibrium Model of Search, Bargaining, and Money," CARESS Working Papres 97-9, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  13. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  14. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  15. S. Rao Aiyagari & Stephen D. Williamson, 1997. "Credit in a Random Matching Model With Private Information," Game Theory and Information 9705005, EconWPA.
  16. Kocherlakota, Narayana & Wallace, Neil, 1998. "Incomplete Record-Keeping and Optimal Payment Arrangements," Journal of Economic Theory, Elsevier, vol. 81(2), pages 272-289, August.
  17. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  18. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
  19. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
  20. Lim, Y. & Townsend, R.M., 1997. "General Equilibrium Models of Financial Systems: Theory and Measurement in Village Economies," Papers 9716, Centro de Estudios Monetarios Y Financieros-.
  21. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  22. Marimon, Ramon & McGrattan, Ellen & Sargent, Thomas J., 1990. "Money as a medium of exchange in an economy with artificially intelligent agents," Journal of Economic Dynamics and Control, Elsevier, vol. 14(2), pages 329-373, May.
  23. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September.
  24. Lacker, Jeffrey M. & Schreft, Stacey L., 1996. "Money and credit as means of payment," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 3-23, August.
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