Journal article

On the Welfare Effects of Credit Arrangements

J Chiu, M Dong, E Shao

International Economic Review | Wiley | Published : 2018

Abstract

This article studies the welfare effects of credit arrangements and how these effects depend on the trading mechanism and inflation. In a competitive market, credit arrangements can be welfare reducing, because high consumption by credit users drives up the price level, reducing consumption by money users who are subject to a binding liquidity constraint. By adopting an optimal trading mechanism, however, these welfare implications can be overturned. Both price discrimination and nonlinear pricing are essential features of an optimal mechanism.

University of Melbourne Researchers

Grants

Awarded by Australian Research Council


Funding Acknowledgements

This article was previously circulated under the title "On the Societal Benefit of Credit Card as a Means of Payment." We thank seminar participants at the University of Melbourne, the Search and Matching Workshop at the University of Pennsylvania, the 2011 Midwest Macro Meetings at Vanderbilt University, the 2011 Canadian Economics Association Annual Meeting at the University of Ottawa, the 2011 North American Summer Meetings of the Econometric Society at Washington University, St. Louis, the 2011 Chicago Fed Summer Workshop on Money, Banking, Payments and Finance, and the 2011 Bank of Canada Annual Conference for their feedback. Dong would like to acknowledge financial support under Australian Research Council's Discovery Early Career Researcher Award scheme (project number: DE120102589). The views expressed in this article are not necessarily the views of the Bank of Canada.