Credit Market Frictions and Coessentiality of Money and Credit

Ohik Kwon () and Manjong Lee
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Ohik Kwon: Department of Economics, Korea University, Seoul, Republic of Korea

No 1602, Discussion Paper Series from Institute of Economic Research, Korea University

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 su fficiently between borrowers, a high-productivity borrower is credit-constrained and is willing to hold money to compensate for the deficiency of her 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)
Date: 2016
New Economics Papers: this item is included in nep-mac and nep-mon
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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 (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:iek:wpaper:1602

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