On the local interaction of money and credit

Abstract

We study the coexistence of monetary and credit transactions in a model where exchange is decentralized. Agents belong to different locations which are informationally separated. The equilibrium mix of monetary and credit transactions is characterized as a function of the frequency of meetings among agents from different locations. Credit transactions take place only among a small set of "neighbors." Monetary trades emerge only if interactions with faraway locations are sufficiently frequent. Even in that case, trades among nearby locations remain non-monetized. (C) 2003 Elsevier Inc. All rights reserved.