DP14051 On Money As a Latent Medium of Exchange

Author(s): Ricardo Lagos, Shengxing Zhang
Publication Date: October 2019
Keyword(s): Cashless, credit, liquidity, monetary policy, money
JEL(s): D83, E52, G12
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14051

We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions directly with money strengthens the stance of sellers of goods and services vis-a-vis intermediaries. We show this mechanism is operative even for sellers who never exercise the option to sell for cash, and that these latent money demand considerations imply monetary policy remains effective through medium-of-exchange channels even if the share of monetary transactions is arbitrarily small.