Credit and Money in a Search Model with Divisible Commodities

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Abstract

This paper examines the competition between money and credit in a search model with divisible commodities. It is shown that fiat money can be valuable even though it yields a lower rate of return than the coexisting credit. The competition between money and credit increases efficiency. The monetary equilibrium with credit Pareto dominates the monetary equilibrium without credit whenever the two coexist. When a credit is repaid with money, the competition also bounds the purchasing power of money from below by that of credit and so eliminates the weak inefficient monetary equilibrium found in previous search models. With numerical examples, three different monetary equilibria are ranked and the properties of the interest rate are examined.

Original languageEnglish (US)
Pages (from-to)627-652
Number of pages26
JournalReview of Economic Studies
Volume63
Issue number4
DOIs
StatePublished - Jan 1 1996

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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