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

Format:

Book

Author/Creator:

Lagos, Ricardo.

Contributor:

National Bureau of Economic Research.

Zhang, Shengxing.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25803.

NBER working paper series no. w25803

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

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.

Notes:

Print version record

May 2019.