Money and credit remix

Abstract

Gu, Mattesini, and Wright (2016) show that credit is irrelevant in a monetary economy with permanent buyer and seller types. In particular, the size of debt limits do not matter for the determination of real allocations. We revisit their irrelevance result in a monetary economy with random types, as in Lagos and Wright (2005). The presence of random types creates a misallocation of liquidity that can be redressed with the use of monetary loans. In these circumstances, credit is not irrelevant and the size of debt limits matter for the determination of real allocations. We use the model to examine the implications of conventional and unconventional policy interventions.