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We develop a theory of money and credit as competing payment instruments, then put it to work in applications. Buyers can use cash or credit, with the former (latter) subject to the inflation tax (transaction costs). Frictions that make the choice of payment method interesting also imply equilibrium price dispersion. We deliver closed-form solutions for money demand. We then show the model can simultaneously account for the price-change facts, cash-credit shares in micro payment data, and money-interest correlations in macro data. We analyze the effects of inflation on welfare, price dispersion and markups. We also describe nonstationary equilibria as self-fulfilling prophecies, which is standard, except here it entails dynamics in the price distribution.

Econometric models. --- Economic forecasting. --- Economics --- Forecasting --- Economic indicators --- Econometrics --- Mathematical models --- Inflation --- Macroeconomics --- Money and Monetary Policy --- Price Level --- Deflation --- Money Supply --- Credit --- Money Multipliers --- Monetary Policy --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Demand for Money --- Monetary economics --- Demand for money --- Currencies --- Sticky prices --- Money --- Prices --- Canada