Money and Loans

Dan Bernhardt ()

Review of Economic Studies, 1989, vol. 56, issue 1, pages 89-100

Abstract: Agents expect to trade with each other infinitely often, but face a temporal absence of a coincidence of wants when they meet. Only loans and/or money can facilitate exchange. In small close-knit economies, enduring trade relationships are valued and loans are optimal. In larger economies, information concerning repayment of loans diffuses too slowly to deter agents from reneging unless loans are severely restricted in magnitude. Money has no such redeemability problems, but if Clower constraints bind, loans help supplement money purchases so that both become essential. Roles of various institutions and the historical evolution of media exchange are explained. Copyright 1989 by The Review of Economic Studies Limited.

Date: 1989
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