Money and Credit
Money and Credit
This chapter first outlines the difference between monetary and credit trades, where the former involves an exchange of goods and services without any future obligations; and the latter are intertemporal and involve a delayed settlement. The chapter then asks questions such as: are the frictions that make monetary exchange essential also compatible with the existence of credit? How does the existence of monetary exchange affect the use and availability of credit? To answer these questions, certain thought experiments and analysis are conducted, such as the introduction of some heterogeneity between trading matches. Through this study, it is shown that in certain environments, credit will be used for large transactions while money will be used for smaller ones. After careful analysis of what factors bring about the emergence of a payment system, the chapter concludes that fundamentals and policies are not enough, histories and social customs are also substantial factors.
Keywords: credit trades, monetary exchange, existence of credit, heterogeneity between trading matches, payment system
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