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

Working Paper No. 26756 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...

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Published in:NBER Working Paper Series 2020-02, p.26756
Format: Article
Language:English
Subjects:
Consumers
Economic theory
Economics
Equilibrium
Macroeconomics
Monetary policy
Monetary theory
Perfect competition
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Summary:Working Paper No. 26756 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.
ISSN:0898-2937
DOI:10.3386/w26756