On Money as a Latent Medium of Exchange

49 Pages Posted: 17 Oct 2019

See all articles by Ricardo Lagos

Ricardo Lagos

New York University (NYU) - Department of Economics

Shengxing Zhang

London School of Economics & Political Science (LSE) - London School of Economics

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Date Written: October 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, monetary policy, money

JEL Classification: D83, E52, G12

Suggested Citation

Lagos, Ricardo and Zhang, Shengxing, On Money as a Latent Medium of Exchange (October 2019). CEPR Discussion Paper No. DP14051. Available at SSRN: https://ssrn.com/abstract=3471245

Ricardo Lagos (Contact Author)

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

269 Mercer Street, 7th Floor
New York, NY 10011
United States
212-998-8937 (Phone)

Shengxing Zhang

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

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