We construct a cash-credit model with positive externalities in the production of credit goods. It is shown that under suitable conditions, the Friedman rule is not optimal and there exists an optimal nominal interest rate that maximizes the social welfare and output. This is because increasing the nominal interest rate improves sectoral misallocations caused by externalities in our economy.

I review in this paper some recent literature that deals with the coexistence of inside and outside money in a matching model of money à la Kiyotaki and Wright. I examine first a class of models that introduce credit by assuming that some agents ’ actions can be monitored and punished by the other agents in the economy. I then turn to a model in which agents can (costly) commit to keep their promises. I also analyse a literature that introduces banks and private money in the model, to evaluate the Hayek-Friedman debate on the private vs. public provision of money. The very last part of the paper is devoted to the issue of coexistence of money and nominal bonds with a higher rate of return. JEL Classification: E40.

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We allow banks to choose between two networks in a simple version of the Cavalcanti and Wallace (1999) model of inside money. Members of a network have access to credit but must redeem banknotes issued by other members in random meetings. We find equilibria in which members of a particular network issue more valuable notes, but face the same ex-ante payoff as that of their competition. Banks are shown to be concerned with both credit externalities and with monetary liabilities. When the size of the bank sector is small, these two opposing forces may result in a stable equilibrium. 1

Alternative payment instruments are studied in an economy with private information, delayed communication, and limited commitment. Attention is restricted to checks and bank drafts, which differ in resource cost and communication characteristics. Checks are less costly but settlement delays create a limited commitment constraint. We Þnd that drafts dominate at low wealths and checks at higher wealths. Applications to 19th century and modern payment systems are discussed.

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I propose a model where agents optimally choose to conduct their business using two payment instruments, money and bilateral credit. A friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit. Money and credit complement each other. With anticipated in‡ation, complementarity implies that the credit to money ratio decreases with in‡ation. Keywords: Coexistence of Money and Credit. JEL Classi…cation: E40 I would like to thank John Hardman Moore for his guidance throughout this project and Nobu Kiyotaki for several insightful conversations. I bene…ted from comments by Aleks Berentsen, Francesco

This paper studies the choice of payment instruments in a simple model where both money and credit can be used as means of payment. We endogenize the acceptability of credit by allowing retailers to invest in a costly record-keeping technology. Our framework captures the two-sided market interaction between consumers and retailers, leading to strategic complemen-tarities that can generate multiple steady-state equilibria. In addition, limited commitment makes debt contracts self-enforcing and yields an endogenous upper bound on credit use. Our model can explain why the demand for credit declines as inflation falls, and how hold-up prob-lems in technological adoption can prevent retailers from accepting credit as consumers continue to coordinate on cash usage. We show that whenever money and credit coexist, equilibrium is generically inefficient and optimal policy entails an inflation rate strictly above the Friedman rule. We also discuss the extent to which our model can reconcile some key patterns in the use of cash and credit in retail transactions.

This paper studies the choice of payment instruments in a simple model where both money and credit can be used as means of payment. We endogenize the acceptability of credit by allowing retailers to invest in a costly record-keeping technology. Our framework captures the two-sided market interaction between consumers and retailers, leading to strategic complemen-tarities that can generate multiple steady-state equilibria. In addition, limited commitment makes debt contracts self-enforcing and yields an endogenous upper bound on credit use. Our model can explain why the demand for credit declines as inflation falls, and how hold-up prob-lems in technological adoption can prevent retailers from accepting credit as consumers continue to coordinate on cash usage. We show that when money and credit coexist, equilibrium is generi-cally inefficient and changes to the debt limit are not neutral. We also discuss the extent to which

Morgan for many helpful comments and encouragements. All possible remaining errors are mine. This paper investigates a relationship between urbanization and velocity of money theoreti-cally and empirically. In this paper, we introduce a second-generation money-search model and an IV-panel …xed-e¤ect econometric model. The empirical model is designed based on the theoretical framework. Then we will …nd the urbanization increases the velocity of money (measured in M2). As extensive discussions, we extend our model to include total factor productivity (TFP). Then we discuss the improvement of banking technology and urban agglomeration as well as the impact of TFP itself.