Essentials of Constructive Heterodoxy: Money, Credit, Interest

The Credit Money and State Money Approaches

Money, credit and banking

In monetary models in which agents are subject to trading shocks there is typically an ex-post inefficiency in that some agents are holding idle balances while others are cash constrained. This inefficiency creates a role for financial intermediaries, such as banks, who accept nominal deposits and make nominal loans. We show that in general financial intermediation improves the allocation and t...

Coessentiality of Money and Credit

We use a random matching model with limited record-keeping to study the essentiality of money and credit. The model is based on Lagos-Wright (2005), but with two rounds of pairwise meetings in each period. The mechanism designer chooses which meetings to use the record-keeping technology, and designs the trading mechanism for each meeting to optimize social welfare. We characterize implementabl...

Money and Interest Rates

This study describes and reconciles two common, seemingly contradictory views about a key monetary policy relationship: that between money and interest rates. Data since 1960 for about 40 countries support the Fisher equation view, that these variables are positively related. But studies taking expectations into account support the liquidity effect view, that they are negatively related. A simp...

Essential interest-bearing money

In the quasi-linear model of Lagos and Wright [A unified framework for monetary theory and policy analysis, J. Polit. Econ. 113 (2005) 463—484], money is essential and—if lump-sum taxation is feasible—the Friedman rule implements the first-best allocation. In this paper, I impose the additional restriction of voluntary trade; so that (coercive) lump-sum taxation is infeasible. Despite this adde...