Money and Credit Revisited

Abstract

Gu, Mattesini, and Wright (2016) show that if money is essential, then nomonetary credit (i.e., deferred payment to sellers) is irrelevant. We find that in an otherwise same model that also allows monetary credit (i.e., borrowing money from third parties), nonmonetary credit is relevant when money is essential. While nonmonetary credit can still be neutral locally, this result critically depends on the tightness of monetary credit. A tight monetary credit limit and loan market clearing restrict how real balances can respond to changes in nonmonetary credit. Money may serve as an accelerator or stabilizer, depending on the types of credit changes and overall credit condition. Our results suggest a subtle three-way relationship among money and the two types of credit.