We analyze money and credit as competing payment instruments in decentralized exchange. In natural environments, we show the economy does not need both: if credit is easy, money is irrelevant; if credit is tight, money is essential, but credit becomes irrelevant. Changes in credit conditions are neutral because real balances respond endogenously to keep total liquidity constant. This is true for both exogenous and endogenous debt limits and policy limits, secured and unsecured lending, and general pricing mechanisms. While we show how to overturn some of these results, the benchmark model suggests credit might matter less than people think.

No abstract

We develop a theory of banking with two features: (i) banks take deposits and make investments on behalf of depositors; (ii) bank liabilities (claims on deposits) facilitate third-party transactions. Existing models have (i) or (ii), not both, even though they are intimately connected: both originate from limited commitment. We describe an environment, characterize feasible and efficient allocations, and interpret the outcomes as banking arrangements. Banks are essential: without them, the set of feasible allocations is inferior. We show that it can be efficient to sacrifice investment returns in favor of more trustworthy demand deposits. We identify characteristics making for good bankers, and confront these predictions with economic history. * We thank many colleagues for comments and discussions, especially

No abstract

We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies. JEL numbers: E32, E51