The Limits of Onetary Economics: On Money as a Latent Medium of Exchange

47 Pages Posted: 18 Feb 2020

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

Date Written: February 2020

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-á-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.

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Suggested Citation

Lagos, Ricardo and Zhang, Shengxing, The Limits of Onetary Economics: On Money as a Latent Medium of Exchange (February 2020). NBER Working Paper No. w26756. Available at SSRN: https://ssrn.com/abstract=3539323

Ricardo Lagos (Contact Author)

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

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United States
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Shengxing Zhang

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

Houghton Street
London WC2A 2AE
United Kingdom

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