0
$\begingroup$

As far as I understand in both cases we are seeking money that we don't have and would like to borrow.

That being said what I find even more misleading is the fact that as a nominal interest rate increase credit increases.

If anyone could clarify this that would be absolutely amazing.

Improve this question
$\endgroup$

2 Answers 2

Reset to default
0
$\begingroup$

That being said what I find even more misleading is the fact that as a nominal interest rate increase credit increases.

This is the so-called Fisher Effect. You have to consider things upside down and, actually, the importance of money supply in the story.

"Credits" (here and there) stimulate demands (here and there) in the national economy. If supplies stay constant -- which it does empirically, at leasts temporarily --, markets will reach a new equilibrium via prices rising due to these stimulated demands, which generates inflation. Finally, higher inflation means higher nominal rates. Why? Because higher inflation (here and there) actually means higher (nominal) returns on equity (here and there). Incidentally, commercial banks (have to attract deposits and) will adjust their (saving) rates accordingly.

But remember that only reality matters when getting an idea of the "performance" of an economy.

Regarding your main question... The word "credit" as such, is used to describe the scriptural ex-nihilo creation of money by commercial banks (and its debt counterpart). When the credit is reimbursed, the money is scripturally destroyed.

Money demand, in contrast, can refer to any type of demand for money, be it stemming from final consumers, firms or even commercial banks themselves. Thus, money demand is conceptually a bigger set than that that we can associate to credits.

Improve this answer
$\endgroup$
3
  • $\begingroup$ Any question @Fozoro ? $\endgroup$
    – keepAlive
    Commented Jan 30, 2019 at 18:28
  • $\begingroup$ Thanks for your answer, sorry for the late reply. I didn't quite understand the difference between credit and money demand $\endgroup$
    – Fozoro
    Commented Jan 30, 2019 at 19:15
  • $\begingroup$ @Forozo. See update. Any question? $\endgroup$
    – keepAlive
    Commented Jan 30, 2019 at 20:17
0
$\begingroup$

I'm not sure what's the nature of the question but:

  • Credit isn't necessarily linked to money. It's linked to the fact that people desire to consume today rather than tomorrow. You can have credit, borrowing and an interest rate in a cashless economy.
  • Demand for money could be abstracted as an extra term in the utility function and/or a cash-in-advance restriction, meaning that the individual seeks to hold money because it makes them happy and allows him to pay for real goods. This, in turn, leads to demand for money.
Improve this answer
$\endgroup$
2
  • $\begingroup$ Thank you very much for your answer. So basically an increase in demand for money doesn't necessarily mean debt (As one could sell all his bonds in order to get money). None the less and increase in credit is equal to an increase in debt as you? $\endgroup$
    – Fozoro
    Commented Jan 30, 2019 at 19:18
  • $\begingroup$ I'd say yes, credit and debt should be the same. $\endgroup$
    – one_teach_wonder
    Commented Feb 8, 2019 at 17:42

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.