Working Paper: CEPR ID: DP14051
Authors: Ricardo Lagos; Shengxing Zhang
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 Codes: D83; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| option to settle transactions directly with money (E42) | strengthens the bargaining position of sellers against intermediaries (L14) |
| presence of cash as an option (E41) | influences prices and allocations in the economy (E64) |
| money demand behavior of cash-only sellers (E41) | shapes broader market dynamics affecting all sellers (D49) |