Money, trade credit and asset prices

No 91-04, Working Paper from Federal Reserve Bank of Richmond

Abstract: We describe a stochastic economic environment in which the mix of money and trade credit used as means of payment is endogenous. The economy has an infinite horizon, spatial separation and a credit-related transaction cost, but no capital. We find that the equilibrium prices of arbitrary contingent claims to future currency differ from those from one-good cash-in-advance models. This anomaly is directly related to the endogeneity of the mix of media of exchange used. In particular, nominal interest rates affect the risk-free real rate of return. The model also has implications for some long-standing issues in monetary policy and for time series analysis using money and trade credit.

Keywords: Money; Prices; Credit (search for similar items in EconPapers)
Date: 1991
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