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 implementable outcomes subject to both individual rationality and pairwise core requirement; this result extends the results in Hu-Kennan-Wallace (2009) by allowing limited recordkeeping. Under limited record-keeping, we obtain coexistence of money and credit as essential means-of-payments in the sense that both are used in any optimal mechanism, and show that the optimal in‡ation rate is (strictly) positive, with the seigniorage revenue used to purchase privately issued debt. Our results show that expansionary monetary policy that subsidizes credit trades is bene…cial for a large set of parameters.