Journal Article

Credit and Money in a Search Model with Divisible Commodities

Shouyong Shi

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 63, issue 4, pages 627-652
Published in print October 1996 | ISSN: 0034-6527
e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.2307/2297797
Credit and Money in a Search Model with Divisible Commodities

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This paper examines the competition between money and credit in a search model with divisible commodities. It is shown that fiat money can be valuable even though it yields a lower rate of return than the coexisting credit. The competition between money and credit increases efficiency. The monetary equilibrium with credit Pareto dominates the monetary equilibrium without credit whenever the two coexist. When a credit is repaid with money, the competition also bounds the purchasing power of money from below by that of credit and so eliminates the weak inefficient monetary equilibrium found in previous search models. With numerical examples, three different monetary equilibria are ranked and the properties of the interest rate are examined.

Journal Article.  0 words. 

Subjects: Economics

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