Decentralized credit and monetary exchange without public record keeping

Summary

We relax a standard assumption on the matching technology in a search model of money. In particular, agents may remain in a long-term partnership as long as it is in their self-interest.With this simple modification, it is possible to support self-enforcing, intertemporal trade which resembles credit without a public record keeping device. We examine conditions for coexistence of currency and credit and the welfare gains/losses associated with the introduction of money.

An earlier version of this paper was entitled “Money and Search with Enduring Relationships”. We wish to thank Narayana Kocherlakota, Rachel Kranton, Jeff Lacker, Andrei Shevchenko, Shouyong Shi, Ted Temzelides, Chris Waller, and especially David Andofolatto, Gabriele Camera, Drew Saunders, and Randy Wright for helpful comments on that earlier draft, as well as seminar participants at the University of Pennsylvania, Purdue University, American Economic Association Meetings, Summer Econometric Society Meetings, and NBER Summer Workshop. Corbae wishes to thank the Research Department at the Federal Reserve Bank of St. Louis for research support.