On the Complementarity of Money and Credit

I propose a model where agents optimally choose to conduct their business using two payment instruments, money and bilateral credit. A friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit. Money and credit complement each other. With anticipated in‡ation, complementarity implies that the credit to money ratio decreases with in‡ation. Keywords: Coexistence of Money and Credit. JEL Classi…cation: E40 I would like to thank John Hardman Moore for his guidance throughout this project and Nobu Kiyotaki for several insightful conversations. I bene…ted from comments by Aleks Berentsen, Francesco De Sinopoli, Leonardo Felli, Luigi Guiso, Nezih Guner, Giovanna Iannantuoni, Neil Wallace and Randy Wright. I thank seminar participants at LSE, Universidad Carlos III de Madrid , Federal Reserve Bank of New York, Bank of England, Ente Einaudi, Econometric Society ASSA Meeting Boston, Midwest Economic Theory Conference at Vanderbilt University and Workshop on Money, Banking and Payment Systems at the Federal Reserve Bank of Cleveland. Remaining errors are mine. Correspondence: Leo Ferraris, Universidad Carlos III de Madrid, Economics Department, Calle Madrid, 126 28903 Getafe (Madrid) Spain, e-mail: [email protected]