The Limits of Monetary Economics: On Money as a Medium of Exchange in Near-Cashless Credit Economies

58 Pages Posted: 17 Oct 2019 Last revised: 23 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

Date Written: October 2019

Abstract

We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that-in contrast to current conventional wisdom in policy-oriented research in monetary economics-the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable-even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations- even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances.

Keywords: asset prices, Cashless, credit, leverage, liquidity, margin, monetary policy

JEL Classification: D83, E52, G12

Suggested Citation

Lagos, Ricardo and Zhang, Shengxing, The Limits of Monetary Economics: On Money as a Medium of Exchange in Near-Cashless Credit Economies (October 2019). CEPR Discussion Paper No. DP14057. Available at SSRN: https://ssrn.com/abstract=3471250

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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