On Money As a Latent Medium of Exchange

46 Pages Posted: 20 Jun 2019

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

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Date Written: June 14, 2019

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 directly with money strengthens the stance of sellers of goods and services vis-a-vis intermediaries. We show this mechanism is operative even for sellers who never exercise the option to sell for cash, and that these latent money demand considerations imply monetary policy remains effective through medium-of-exchange channels even if the share of monetary transactions is arbitrarily small.

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

JEL Classification: D83, E52, G12

Suggested Citation

Lagos, Ricardo and Zhang, Shengxing, On Money As a Latent Medium of Exchange (June 14, 2019). 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 )

Houghton Street
London WC2A 2AE
United Kingdom

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