On Money as a Medium of Exchange in Near-Cashless Credit Economies / Ricardo Lagos, Shengxing Zhang.

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Lagos, Ricardo

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w25803.Publication details: Cambridge, Mass. National Bureau of Economic Research 2019.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that--in contrast to current conventional wisdom in policy-oriented research in monetary economics--the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable--even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations--even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w25803 (Browse shelf(Opens below))	Not For Loan

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May 2019.

We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that--in contrast to current conventional wisdom in policy-oriented research in monetary economics--the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable--even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations--even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances.