Money and Credit: Theory and Applications

By Liang Wang, Randall Wright, Lucy Qian Liu

January 27, 2017

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Format: Chicago

Liang Wang, Randall Wright, and Lucy Qian Liu. Money and Credit: Theory and Applications, (USA: International Monetary Fund, 2017) accessed December 3, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We develop a theory of money and credit as competing payment instruments, then put it to work in applications. Buyers can use cash or credit, with the former (latter) subject to the inflation tax (transaction costs). Frictions that make the choice of payment method interesting also imply equilibrium price dispersion. We deliver closed-form solutions for money demand. We then show the model can simultaneously account for the price-change facts, cash-credit shares in micro payment data, and money-interest correlations in macro data. We analyze the effects of inflation on welfare, price dispersion and markups. We also describe nonstationary equilibria as self-fulfilling prophecies, which is standard, except here it entails dynamics in the price distribution.

Subject: Credit, Currencies, Demand for money, Inflation, Money, Prices, Sticky prices

Keywords: Burdett-Judd price, Buyer-seller ratio, Credit, Currencies, Demand for money, Fixed-cost model, Global, Inflation, Menu cost, Money, Money demand, Money demand function, Nominal rate, Price change, Price Dispersion, Price distribution, Sticky Prices, WP

Publication Details

Pages:

54
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/014
Stock No:

WPIEA2017014
ISBN:

9781475572339
ISSN:

1018-5941

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