{ "title": "Money and Credit: Theory and Applications", "publication": "IMF Working Papers, January 27, 2017", "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593", "canonical": "https://www.imf.org/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593", "overlayPath": "/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593/index.md", "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).", "sections": [ { "heading": "Summary", "content": "- We develop a theory of money and credit as competing payment instruments, then put it to work in applications.\n- Buyers can use cash or credit, with the former (latter) subject to the inflation tax (transaction costs).\n- Frictions that make the choice of payment method interesting also imply equilibrium price dispersion.\n- We deliver closed-form solutions for money demand.\n- The model can simultaneously account for the price-change facts, cash-credit shares in micro payment data, and money-interest correlations in macro data.\n- We analyze the effects of inflation on welfare, price dispersion and markups.\n- We describe nonstationary equilibria as self-fulfilling prophecies, which is standard, except here it entails dynamics in the price distribution." }, { "heading": "Key findings and contributions", "content": "- Theory framing:\n - Money and credit are modeled as competing payment instruments.\n - Cash is exposed to the inflation tax; credit is exposed to transaction costs.\n- Equilibrium implications:\n - Presence of frictions leads to equilibrium price dispersion.\n - Closed-form solutions for money demand are provided.\n- Empirical applicability:\n - The model accounts for:\n - Price-change facts.\n - Cash-credit shares in micro payment data.\n - Money-interest correlations in macro data.\n- Dynamics:\n - Nonstationary equilibria are characterized as self-fulfilling prophecies that produce dynamics in the price distribution." }, { "heading": "Model elements and terminology", "content": "- Payment instruments: cash, credit.\n- Frictions and costs: inflation tax (on cash), transaction costs (on credit).\n- Price outcomes: equilibrium price dispersion; dynamics in the price distribution.\n- Analytical deliverables: closed-form money demand functions.\n- Technical terms preserved from the source: Burdett-Judd price, buyer-seller ratio, fixed-cost model, menu cost, nominal rate, price change, Price Dispersion, price distribution, Sticky Prices, money demand function, markups." }, { "heading": "Policy analysis and welfare", "content": "- Analysis addresses effects of inflation on:\n - Welfare.\n - Price dispersion.\n - Markups.\n- The framework links monetary variables (inflation, nominal rates) to payment method choice and macroeconomic price behavior." }, { "heading": "Publication and metadata", "content": "- Authors: Liang Wang, Randall Wright, Lucy Qian Liu\n- Date: January 27, 2017\n- Series: IMF Working Papers\n- Working Paper No.: 2017/014\n- Issue: 014\n- Volume: 2017\n- Pages: 54\n- DOI: https://doi.org/10.5089/9781475572339.001\n- Stock No: WPIEA2017014\n- ISBN: 9781475572339\n- ISSN: 1018-5941\n- Subject tags: Credit, Currencies, Demand for money, Inflation, Money, Prices, Sticky prices\n- 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\n\nIMF Working Paper — \"Money and Credit: Theory and Applications\" (January 27, 2017) by Liang Wang, Randall Wright, Lucy Qian Liu.\n\n---\n\n Content in this bundle\n\n- Money and Credit: Theory and Applications\n - Money and Credit: Theory and Applications (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Money and Credit: Theory and Applications (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593" } ], "bullets": [ "[Markdown version](/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593/index.md)", "[Structured JSON version](/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593/index.json)", "[Bundle manifest](/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593/bundle-manifest.json)", "Authors: Liang Wang, Randall Wright, Lucy Qian Liu", "Published: January 27, 2017", "Series: IMF Working Papers", "DOI: https://doi.org/10.5089/9781475572339.001", "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.", "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 describe nonstationary equilibria as self-fulfilling prophecies, which is standard, except here it entails dynamics in the price distribution.", "Theory framing:", "Equilibrium implications:", "Empirical applicability:", "Dynamics:", "Payment instruments: cash, credit.", "Frictions and costs: inflation tax (on cash), transaction costs (on credit).", "Price outcomes: equilibrium price dispersion; dynamics in the price distribution.", "Analytical deliverables: closed-form money demand functions.", "Technical terms preserved from the source: Burdett-Judd price, buyer-seller ratio, fixed-cost model, menu cost, nominal rate, price change, Price Dispersion, price distribution, Sticky Prices, money demand function, markups.", "Analysis addresses effects of inflation on:", "The framework links monetary variables (inflation, nominal rates) to payment method choice and macroeconomic price behavior.", "Authors: Liang Wang, Randall Wright, Lucy Qian Liu", "Date: January 27, 2017", "Series: IMF Working Papers", "Working Paper No.: 2017/014", "Issue: 014", "Volume: 2017", "Pages: 54", "DOI: https://doi.org/10.5089/9781475572339.001", "Stock No: WPIEA2017014", "ISBN: 9781475572339", "ISSN: 1018-5941", "Subject tags: 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", "**Money and Credit: Theory and Applications**" ], "related": [ { "title": "Money and Credit: Theory and Applications", "role": "document", "sourceUrl": "https://www.imf.org/-/media/files/publications/wp/wp1714.pdf", "summary": { "path": "/-/media/files/publications/wp/wp1714.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/files/publications/wp/wp1714.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593/index.md", "json": "/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593/index.json", "bundleManifest": "/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593/bundle-manifest.json" }, "generatedAtUtc": "2026-09-18T10:59:25.512Z" }