The Limits of <i>onetary Economics</i>: On Money as a Latent Medium of Exchange
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-á-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.
Lagos is thankful for the support from the C.V. Starr Center for Applied Economics at NYU. Zhang is thankful for the support from the Centre for Macroeconomics at LSE and ESRC-NSFC Grant on “Building Debt Capital Markets in China”. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
New York University is my primary employer. In addition, I have occasional consulting or teaching arrangements with a number of other institutions. During the last five years, the following institutions have paid me or given me grants or in-kind support valued cumulatively at more than $10,000.
Bank of Canada
Central Bank of the Republic of Armenia
Federal Reserve Bank of Minneapolis
Journal of Economic Theory (Elsevier)
Universidad Torcuato Di Tella
University College London
University of Minnesota