A Search Model of Money and Circulating Private Debt with Applications to Monetary Policy

Yiting Li ()

International Economic Review, 2001, vol. 42, issue 4, 925-46

Abstract: A search-theoretic model is used to examine the coexistence of money and circulating private debt. Money is still valued even though there coexists credit which circulates among agents and dominates in the rate of return. When there coexist multiple equilibria, the equilibrium with credit Pareto dominates the one without credit if money supply is not extremely plentiful. This article also provides some predictions about the effects of monetary policies. A policy of open market operations whereby government discounts less for second-hand debt decreases the value of money, credit, and interest rate prevailing in the market. This policy can also improve welfare by making credit trade feasible when the only equilibrium entails no credit without intervention.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:ier:iecrev:v:42:y:2001:i:4:p:925-46

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