The Limits of onetary Economics: On Money as a Latent Medium of Exchange

Ricardo Lagos and Shengxing Zhang

No 26756, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions with money strengthens the stance of sellers of goods and services vis-à-vis intermediaries, and show this mechanism is operative even for sellers who never exercise the option to sell for cash. These latent money demand considerations imply that in general, in contrast to current conventional wisdom in policy-oriented research in monetary economics, monetary policy remains effective through medium-of-exchange transmission channels—even in highly developed credit economies where the share of monetary transactions is negligible.

JEL-codes: D83 E5 G12 (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pay
Note: EFG ME
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Citations: View citations in EconPapers (7)

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Working Paper: The Limits of onetary Economics: On Money as a Latent Medium of Exchange (2021)
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