Working Paper: NBER ID: w26756
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 with money strengthens the stance of sellers of goods and services vis-à-vis intermediaries, and show this mechanism is operative even for sellers who never exercise the option to sell for cash. These latent money demand considerations imply that in general, in contrast to current conventional wisdom in policy-oriented research in monetary economics, monetary policy remains effective through medium-of-exchange transmission channels—even in highly developed credit economies where the share of monetary transactions is negligible.
Keywords: Monetary Economics; Medium of Exchange; Credit Markets
JEL Codes: D83; E5; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| the option to settle transactions with money (E42) | bargaining power of sellers (D43) |
| the option to settle transactions with money (E42) | bargaining power of sellers against intermediaries (L14) |
| bargaining power of sellers (D43) | negotiation of better terms (C78) |
| monetary policy (E52) | consumption (E21) |
| monetary policy (E52) | welfare (I38) |
| deposit spread imposed by banks and price elasticity of demand (G21) | magnitude of effect of monetary policy on consumption and welfare (E21) |