Money and Credit Coexistence, Excess Capacity, and the Size of Monetary Aggregates

Abstract

This paper develops a model where money is demanded in excess of spending needs. As a result, money coexists with large availabilities of credit and the model explains the levels of monetary aggregates held in modern economies via the endogenous creation of inside money. At the heart of the model, there is a search friction in the goods market, which generates spare production and spending capacity. As a consequence, there is an endogenous productivity wedge, due to spare production capacity, and an endogenous money velocity, due to spare spending capacity.