## Money and Credit: Theory and Applications

_IMF Working Papers, January 27, 2017_

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## Bibliographic details
- Authors: Liang Wang, Randall Wright, Lucy Qian Liu
- Published: January 27, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475572339.001

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### 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.
- 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.

### Key findings and contributions
- Theory framing:
  - Money and credit are modeled as competing payment instruments.
  - Cash is exposed to the inflation tax; credit is exposed to transaction costs.
- Equilibrium implications:
  - Presence of frictions leads to equilibrium price dispersion.
  - Closed-form solutions for money demand are provided.
- Empirical applicability:
  - The model accounts for:
    - Price-change facts.
    - Cash-credit shares in micro payment data.
    - Money-interest correlations in macro data.
- Dynamics:
  - Nonstationary equilibria are characterized as self-fulfilling prophecies that produce dynamics in the price distribution.

### Model elements and terminology
- 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.

### Policy analysis and welfare
- Analysis addresses effects of inflation on:
  - Welfare.
  - Price dispersion.
  - Markups.
- The framework links monetary variables (inflation, nominal rates) to payment method choice and macroeconomic price behavior.

### Publication and metadata
- 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

*IMF Working Paper — "Money and Credit: Theory and Applications" (January 27, 2017) by Liang Wang, Randall Wright, Lucy Qian Liu.*

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_Source: https://www.imf.org/en/publications/wp/issues/2017/01/27/money-and-credit-theory-and-applications-44593_