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Money and Credit as Means of Payment: A New Monetarist Approach

Sébastien Lotz () and Cathy Zhang ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies the choice of payment instruments in a simple model where both money and credit can be used as means of payment. We endogenize the acceptability of credit by allowing retailers to invest in a costly record-keeping technology. Our framework captures the two-sided market interaction between consumers and retailers, leading to strategic complementarities that can generate multiple steady-state equilibria. In addition, limited commitment makes debt contracts self-enforcing and yields an endogenous upper bound on credit use. So long as record-keeping is imperfect, money and credit coexist for a range of nominal interest rates. Our model captures the dependence of debt limits on monetary policy and explains how hold-up problems in technological adoption prevent retailers from accepting credit as consumers continue to coordinate on cash usage. With limited commitment, changes in monetary policy generate multiplier effects in the credit market due to complementarities between consumer borrowing and the adoption of credit by merchants.

Keywords: money and credit; limited commitment; endogenous record-keeping (search for similar items in EconPapers)
JEL-codes: E41 E51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
Date: 2015-05
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Journal Article: Money and credit as means of payment: A new monetarist approach (2016) Downloads
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