Posted: 10 Jan 2012
Date Written: December 2011
Modern payment instruments can be complex. Yet, many of these can be interpreted as a form of money or credit, which are rather primitive instruments. We use a simple model of a monetary economy to provide an overview of some of the fundamental questions in the literature on payments. Why do agents pay? What are the frictions that prevent or limit the use of credit arrangements? Why is fiat money valued? Why do money and credit coexist? Our simple model can address these basic and important questions, and can be extended to address a variety of issues related to payments.
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