Money and credit in liquidity provision

This paper studies the liquidity provision in a model where the roles of mo ney are challenged by other financial instruments. Alternative to money, cr edit can be used as means of payment and rate dominating assets are availab le to serve as stores of value. Two features are found to be crucial in ren dering money valuable in this environment: information asymmetry in credit trading relationship and uncertainty in individuals' liquidity demand. In g eneral, the model economy can display a payment mechanism of money-only, cr edit-only, or mixed-use of money and credit in transactions, depending on t he severity of the information asymmetry. The optimal quantity of money in our paper is shown to contrast those in other monetary models. (C) 2001 Els evier Science B.V. All rights reserved.