Search models of money: Alternative means-of payment and consumer behaviour with credit

• Main Author: TAN, Kheng Tat Marcus
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: Search Models; Coexistence of Money and Credit; Limited Commitment; Money; Fiat Money; E-Money; Digital Currency; Money Distribution; Credit; Debt; Deposits; Collateral; Housing; Liquidity; Asset Prices; Monetary Policy; Welfare; Heterogeneous Agents; Behavioral Economics; Economics
• Online Access: https://ink.library.smu.edu.sg/etd_coll/510; https://ink.library.smu.edu.sg/context/etd_coll/article/1508/viewcontent/Search_Models_of_Money___Alternative_Means_of_Payment_and_Consumer_Behaviour_with_Credit.pdf
• Institution: Singapore Management University

This dissertation consists of three chapters on Search Models of Money. The first chapter is a review of recent advances in Search Models of Money. It reviews the Lagos and Wright (2005) framework which is the workhorse of many modern search models with applications to models with Competing Media of Exchange to Fiat Currency, and models with Money and Credit. We trace the history of the development of search models of money from the first generation to present day. We highlight recent developments that address puzzles such as the coexistence of money in an environment where an asset serves as both an alternative means-of-payment and a superior store of value. We look at search models of money with credit which address the fact that in the original LW framework, credit could not exist because agents are anonymous in the decentralized market while in the centralized market all agents can work with linear utility in hours rendering credit unnecessary. The second chapter explores the adoption and acceptance of alternative means-of-payment to fiat currency. We determine the inflation rate and transaction costs of adoption that encourage the adoption of an alternative means-of-payment. However, the buyer’s bargaining power must also be high enough for money and the asset to co-exist as means of payment, otherwise buyers will choose to use money only for low inflation and asset only for high inflation. We observe that when inflation is low, for a given fraction of acceptance of the alternative means-ofpayment by sellers, and the cost of holding money is not great so the benefit of using the asset as an alternative means-of-payment to the buyer is negative or zero, and buyers will not adopt the asset. At high inflation when the asset is adopted and accepted as an alternative means-of-payment, when acceptance rate is low, welfare gains are limited because agents do not use too much of the asset as an alternative means-of-payment. However, when the acceptance rate is high, the welfare gains are much higher. In equilibria where money and the asset co-exist as means of payment, increasing the seller’s acceptance rate of the asset as means-of-payment encourages the adoption of the asset as means-of-payment at lower inflation rates. The third chapter investigates consumer behaviour in an environment with two types of credit – secured and unsecured credit, and with four types of agents – (1) low-income agents with high consumption needs, (2) high-income agents with high consumption needs, (3) low-income agents with low consumption needs, and (4) high-income agents with low consumption needs. Given each agent has a strictly less than one probability of access to financial markets or credit, this gives rise to a total of eight heterogenous agents. As inflation increases, the cost of money increases resulting in agents carrying less fiat currency and relying more on credit to finance their consumption needs. Low-income agents with high consumption needs are always the first to require credit while in most situations, high-income agents with low consumption needs never need credit. Credit relaxes liquidity constraints of agents and as inflation increases, welfare decreases because agents carry less money and rely on credit to finance consumption needs. At high levels of inflation, agents start to have insufficient liquidity to obtain the optimal DM quantity of good. Calibrating to US data, we find welfare loss range from 1% to 4% for every 0.1% increase in inflation. Because of our diverse types of agents, we are able to show that inflation affects high consumption agents the most, especially those without access to credit.