The Limits of onetary Economics: On Money as a Constraint on Market Power

69 Pages Posted: 20 Jun 2019 Last revised: 13 Sep 2021

See all articles by Ricardo Lagos

Ricardo Lagos

New York University (NYU) - Department of Economics

Shengxing Zhang

London School of Economics (LSE) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2021

Abstract

We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions with money strengthens the stance of sellers of goods and services vis-a-vis intermediaries, and show this mechanism is operative even for sellers who never exercise the option to sell for cash. These latent money demand considerations imply that in general, in contrast to current conventional wisdom in policy-oriented research in monetary economics, monetary policy remains effective through medium-of-exchange transmission channels—even in highly developed credit economies where the share of monetary transactions is negligible.

Keywords: cashless, credit, liquidity, money, monetary policy, market power

JEL Classification: D83, E52, G12

Suggested Citation

Lagos, Ricardo and Zhang, Shengxing, The Limits of onetary Economics: On Money as a Constraint on Market Power (July 1, 2021). Available at SSRN: https://ssrn.com/abstract=3404153 or http://dx.doi.org/10.2139/ssrn.3404153

Ricardo Lagos

New York University (NYU) - Department of Economics ( email )

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Shengxing Zhang (Contact Author)

London School of Economics (LSE) - Department of Economics ( email )

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United Kingdom

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