Money and Credit : Theory and Applications

Author/Editor:

Liang Wang ; Randall Wright ; Lucy Qian Liu

Publication Date:

January 27, 2017

Electronic Access:

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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.

Series:

Working Paper No. 17/14

Subject:

English

Publication Date:

January 27, 2017

ISBN/ISSN:

9781475572339/1018-5941

Stock No:

WPIEA2017014

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

54

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