Money and credit in liquidity provision |
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| Institution: | 1. Business School, Ningbo University, Zhejiang Ningbo 315211, PR China;2. Belk College of Business, University of North Carolina at Charlotte, NC 28223, USA;3. School of Economics and Management, Tongji University, Shanghai 200092, PR China;1. KU Leuven and CEPR, Department of Accountancy, Finance and Insurance, Naamsestraat 69, 3000 Leuven, Belgium;2. VU University Amsterdam, Department of Finance, De Boelelaan 1105, 1081HV Amsterdam, The Netherlands;3. University of Zurich, SFI and CEPR, Department of Banking and Finance, Plattenstrasse 32, CH-8032 Zurich, Switzerland;1. Department of Economics, University of Massachusetts, Lowell. Falmouth Hall, Room 302; One University Avenue, Lowell, MA 01854, USA;2. Department of Economics, Tufts University, Braker Hall, 8 Upper Campus Road, Medford, MA 02155, USA |
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| Abstract: | This paper studies the liquidity provision in a model where the roles of money are challenged by other financial instruments. Alternative to money, credit can be used as means of payment and rate dominating assets are available to serve as stores of value. Two features are found to be crucial in rendering money valuable in this environment: information asymmetry in credit trading relationship and uncertainty in individuals' liquidity demand. In general, the model economy can display a payment mechanism of money-only, credit-only, or mixed-use of money and credit in transactions, depending on the severity of the information asymmetry. The optimal quantity of money in our paper is shown to contrast those in other monetary models. |
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