Credit Market Frictions and Coessentiality of Money and Credit

Ohik Kwon (okwon@bok.or.kr) and Manjong Lee
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Ohik Kwon: Economic Research Institute, Bank of Korea

No 2020-23, Working Papers from Economic Research Institute, Bank of Korea

Abstract: We explore how credit market frictions matter for the coessentiality of money and credit. There are high-productivity and low-productivity borrowers. Limited commitment can yield a one-for-one credit limit in accordance with a borrower's productivity. An adverse selection problem caused by asymmetric information, however, makes lenders impose the credit limit of a low-productivity borrower on a high-productivity borrower. If productivities differ sufficiently between borrowers, a high-productivity borrower is credit-constrained and is willing to hold money to compensate for the deficiency of their credit limit, but a low-productivity borrower is not. This eventually implies the coessentiality of money and credit in the sense that the use of both improves the allocation from a social welfare perspective.

Keywords: Asymmetric Information; Adverse Selection; Cash; Coessentiality; Credit (search for similar items in EconPapers)
JEL-codes: E41 E44 E50 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2020-11-05
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https://www.bok.or.kr/ucms/cmmn/file/fileDown.do?m ... 00000020393&fileSn=1 Working Paper, 2020 (application/pdf)

Related works:
Journal Article: Credit Market Frictions and Coessentiality of Money and Credit (2024)
Working Paper: Credit Market Frictions and Coessentiality of Money and Credit (2016)
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