I propose a model where agents choose to conduct their business using two payment instruments, money and bilateral credit. A friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit. Money and credit complement each other. With anticipated inflation, complementarity implies that the credit to money ratio decreases with inflation.
Ferraris, L. (2010). On the complementarity of money and credit. EUROPEAN ECONOMIC REVIEW, 54(5), 733-741 [10.1016/j.euroecorev.2009.12.003].
On the complementarity of money and credit
Ferraris, L
2010
Abstract
I propose a model where agents choose to conduct their business using two payment instruments, money and bilateral credit. A friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit. Money and credit complement each other. With anticipated inflation, complementarity implies that the credit to money ratio decreases with inflation.
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