NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Limits of onetary Economics: On Money as a Latent Medium of Exchange

Ricardo Lagos, Shengxing Zhang

NBER Working Paper No. 26756
Issued in February 2020
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

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-รก-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.

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Document Object Identifier (DOI): 10.3386/w26756

 
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