Money and credit as means of payment: A new monetarist approach

Abstract

We study the choice of payment instruments in a model with money and credit, where sellers must invest in a record-keeping technology to accept credit and buyers have limited commitment. Our model captures the two-sided market interaction between consumers and retailers that can generate multiple equilibria. Limited commitment yields an endogenous debt limit that depends on monetary policy. Money and credit coexist for a range of parameters, and bargaining related hold-up problems can lead to inefficiencies in the adoption of monitoring technologies. Changes in monetary policy generate multiplier effects in the credit market due to complementarities between consumer borrowing and the adoption of credit by merchants.