Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-14T01:34:13.275Z Has data issue: false hasContentIssue false
  • English
  • Français

MONEY AND CREDIT REMIX

Published online by Cambridge University Press:  28 September 2020

Luis Araujo  and
Leo Ferraris
Luis Araujo
Affiliation:
Michigan State University and Getulio Vargas Foundation
Leo Ferraris*
Affiliation:
Universita’ di Roma, Tor Vergata
*
Address correspondence to: Leo Ferraris, Universita’ di Roma, Tor Vergata, via Columbia 2, 00133, Rome, Italy. e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Money and credit are ubiquitous in actual economies, but there is an active theoretical debate on whether they are both necessary if they can both be used in all transactions. Recently, Gu et al. (2016) have shown that money and credit cannot be simultaneously essential and debt limits do not matter for the determination of real allocations in a class of monetary economies. In this paper, we revisit their irrelevance result in a monetary economy based on Lagos and Wright (2005), which exhibits a misallocation of liquidity that is common in search models of money. We show that monetary loans, which naturally require the use of both money and credit, implement Pareto superior allocations in which the size of debt limits matters.

Keywords

MoneyCreditEssentialityMonetary Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 4 , June 2022 , pp. 1021 - 1034
Copyright
© 2020 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This paper has been presented at the 2018 Wisconsin Midwest Macro meetings and at the 2018 St. Louis Fed Summer Workshop on Money, Banking, Payments, and Finance. Comments and suggestions by seminar participants are gratefully acknowledged. Remaining errors are ours alone.

References

REFERENCES

Araujo, L. and Hu, T.-W. (2018) Optimal monetary intervention in credit markets. Journal of Economic Theory 178, 455–487.CrossRefGoogle Scholar
Berentsen, A., Camera, G. and Waller, C. (2007) Money, credit and banking. Journal of Economic Theory 135, 171–195.CrossRefGoogle Scholar
Bernanke, B. (2009) The Crisis and the Policy Response, Stamp Lecture, London School of Economics, mimeoGoogle Scholar
Ferraris, L. and Watanabe, M. (2008) Collateral secured loans in a monetary economy. Journal of Economic Theory 143, 405–424.CrossRefGoogle Scholar
Gomis-Porqueras, P. and Sanches, D. (2013) Optimal monetary policy in a model of money and credit. Journal of Money, Credit and Banking 45, 701–730.CrossRefGoogle Scholar
Gu, C., Mattesini, F. and Wright, R. (2016) Money and credit redux. Econometrica 84, 1–32.CrossRefGoogle Scholar
Holmstrom, B. and Tirole, J. (1998) Private and public supply of liquidity. Journal of Political Economy 106, 1–40.CrossRefGoogle Scholar
Kochelakota, N. (1998) Money is memory. Journal of Economic Theory 81, 232–251.CrossRefGoogle Scholar
Kochelakota, N. (2003) Societal benefits of illiquid bonds. Journal of Economic Theory 108, 179–193.CrossRefGoogle Scholar
Lagos, R. and Wright, R. (2005) A unified framework for monetary theory and policy analysis. Journal of Political Economy 113, 463–484.CrossRefGoogle Scholar
Lagos, R. and Zhang, S. (2019) A monetary model of bilateral over-the-counter markets. Review of Economic Dynamics 33, 205–227.CrossRefGoogle Scholar
Lagos, R. and Zhang, S. (2019) On Money as a Medium of Exchange in Near-Cashless Credit Economies, mimeoCrossRefGoogle Scholar
Lotz, S. and Zhang, C. (2016) Money and credit as means of payment: A new monetarist approach. Journal of Economic Theory 164, 68–100.CrossRefGoogle Scholar
Lucas, R. (1990) Liquidity and interest rates. Journal of Economic Theory 50, 237–264.CrossRefGoogle Scholar
Lucas, R. and Stokey, N. (1987) Money and interest in a cash in advance economy. Econometrica 55, 491–513.CrossRefGoogle Scholar
Rocheteau, G. and Wright, R. (2005) Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium. Econometrica 73, 175–202.CrossRefGoogle Scholar
Woodford, M. (1990) Public debt as private liquidity. American Economic Review 80, 382–388.Google Scholar