Money and Credit Revisited
26 Pages Posted: 19 Dec 2019 Last revised: 11 Feb 2021
Date Written: September 15, 2019
Gu, Mattesini, and Wright (2016) show that if money is essential, then nomonetary credit (i.e., deferred payment to sellers) is irrelevant. We find that in an otherwise same model that also allows monetary credit (i.e., borrowing money from third parties), nonmonetary credit is relevant when money is essential. While nonmonetary credit can still be neutral locally, this result critically depends on the tightness of monetary credit. A tight monetary credit limit and loan market clearing restrict how real balances can respond to changes in nonmonetary credit. Money may serve as an accelerator or stabilizer, depending on the types of credit changes and overall credit condition. Our results suggest a subtle three-way relationship among money and the two types of credit.
Keywords: Money, Credit, Debt, Essentiality, Neutrality
JEL Classification: E42, E51
Suggested Citation: Suggested Citation