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Co-essentiality of money and credit: A mechanism-design view

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  • van Buggenum, Hugo
  • Rabinovich, Stanislav

Abstract

Under what conditions are money and credit jointly essential for trade? We answer this question by applying a mechanism-design approach to a standard monetary search model, augmented with two types of credit technologies. First, payment can be enforced up to some exogenous amount (enforcement-based credit). Second, default on past promises can be partially monitored by future trading partners (monitoring-based credit). We characterize implementable allocations subject to individual rationality and bilateral efficiency of trades. Consistent with prior literature, we find that money and monitoring-based credit cannot be jointly essential. However, we show that money and enforcement-based credit are jointly essential as long as neither payment instrument by itself is sufficient to implement a first-best. Money is memory, but it is not enforcement.

Suggested Citation

  • van Buggenum, Hugo & Rabinovich, Stanislav, 2023. "Co-essentiality of money and credit: A mechanism-design view," Journal of Economic Theory, Elsevier, vol. 213(C).
    • Handle: RePEc:eee:jetheo:v:213:y:2023:i:c:s0022053123001308
    DOI: 10.1016/j.jet.2023.105734
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    More about this item

    Keywords

    Money; Credit; Search; Essentiality; Mechanism design;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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