Seminar 237/281: Macro/International Seminar - "On Money as a Medium of Exchange in Near-Cashless Credit Economies"

Seminar | April 16 | 2-4 p.m. | 597 Evans Hall

 Ricardo Lagos, Professor of Economics, NYU

 Department of Economics

Abstract: We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that --in contrast to current conventional wisdom in policy-oriented research in monetary economics-- the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable --even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations --even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances.

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