Money and Credit Redux

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 is essential, but credit becomes irrelevant. Changes in credit conditions are neutral because real balances respond endogenously to keep total liquidity constant. This is true for both exogenous and endogenous debt limits and policy limits, secured and unsecured lending, and general pricing mechanisms. While we show how to overturn some of these results, the benchmark model suggests credit might matter less than people think.

Money and credit as means of payment: A new monetarist approach

“…9 Moreover, since changes to the debt limit are neutral, their results imply that monetary policy has no effect on credit market behavior. Despite having similar topics and methods, our paper and Gu, Mattesini, and Wright (2014) feature different environments and we highlight very different findings. While Gu, Mattesini, and Wright (2014) consider a representative agent model with complete access to record-keeping by sellers, we consider heterogeneous record-keeping across sellers (both exogenously and endogenously).…”

“…Despite having similar topics and methods, our paper and Gu, Mattesini, and Wright (2014) feature different environments and we highlight very different findings. While Gu, Mattesini, and Wright (2014) consider a representative agent model with complete access to record-keeping by sellers, we consider heterogeneous record-keeping across sellers (both exogenously and endogenously). As we show, this distinction is critical for obtaining the coexistence of money and credit at the individual transaction level, a role for monetary policy to affect debt limits, and strategic complementarities between equilibrium borrowing and the aggregate availability of credit.…”

“…Hence when both money and credit are used, an exogenous change in policy that raises debt limits will not completely crowd out money. We show that this result holds so long as a fraction of sellers still take cash, thereby breaking the typical neutrality result that arises in economies with perfect access to record-keeping by sellers (Gu, Mattesini, and Wright (2014)). …”

“…However, money remains the only means of payment since goods transactions remain private information. This channel is also present in other models of unsecured credit with limited enforcement, such as Sanches and Williamson (2010), Bethune, Rocheteau, and Rupert (2014), and Gu, Mattesini, and Wright (2014), among many others.…”

“…More recently, there are several models featuring divisible money and centralized credit markets using the Lagos and Wright (2005) model, including Berentsen, Camera, and Waller (2007), Telyukova and Wright (2008), Sanches and Williamson (2010), Bethune, Rocheteau, and Rupert (2014), Gu, Mattesini, and Wright (2014), and Liu, Wang, and Wright (2014). However in all these approaches, only an exogenous subset of agents can use credit while the acceptability of credit is endogenous in this paper.…”