Journal article
Money and Costly Credit
M Dong, S Huangfu
Journal of Money Credit and Banking | WILEY | Published : 2021
DOI: 10.1111/jmcb.12845
Abstract
We study an economy in which money and credit serve as a means of payment and the settlement of credit requires money. The model extends recent developments in microfounded monetary theory to address the choice of payment methods and the effects of inflation. Whether a buyer uses money or credit depends on the fixed cost of credit and the inflation rate. In particular, inflation not only makes money less valuable, but also makes credit more expensive because of the delayed settlement. The model predicts that either very low inflation or very high inflation hampers the use of credit.
Grants
Awarded by Australian Research Council
Funding Acknowledgements
We would like to thank David Andolfatto, Jonathan Chiu, Geoffrey Dunbar, Ben Fung, Hua Jiang, Alex Karaivanov, Fernando Martin, Daniel Monte, James Morley, Irina Telyukova, Chris Waller, Randy Wright, and seminar participants at many conferences and seminars for helpful suggestions. We also thank the editor and an anonymous reviewer for their constructive comments, which helped us to improve the manuscript. Dong acknowledges financial support under Australian Research Council's DECRA scheme (project number: DE120102589).