IDEAS home Printed from https://ideas.repec.org/a/eee/moneco/v83y2016icp71-89.html
   My bibliography  Save this article

Interest rates and prices in an inventory model of money with credit

Author

Listed:
  • Dotsey, Michael
  • Guerron-Quintana, Pablo A.

Abstract

Using a segmented market model that includes state-dependent asset market decisions along with access to credit, we analyze the impact that transactions credit has on interest rates and prices. The availability of credit allows agents to significantly smooth consumption, reduce the movements in velocity, prices become quite flexible and liquidity effects are dampened. As credit costs decline in the model so does the effectiveness of monetary policy. We also investigate the recessionary consequences of a shock to the cost of credit, and find that the model׳s predictions align well with the empirical evidence.

Suggested Citation

  • Dotsey, Michael & Guerron-Quintana, Pablo A., 2016. "Interest rates and prices in an inventory model of money with credit," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 71-89.
    • Handle: RePEc:eee:moneco:v:83:y:2016:i:c:p:71-89
    DOI: 10.1016/j.jmoneco.2016.08.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304393216300782
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmoneco.2016.08.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Klee, Elizabeth, 2008. "How people pay: Evidence from grocery store data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 526-541, April.
    2. Guerron-Quintana, Pablo A., 2011. "The implications of inflation in an estimated new Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 947-962, June.
    3. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 655-690.
    4. Annette Vissing-Jorgensen, 2000. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," Econometric Society World Congress 2000 Contributed Papers 1102, Econometric Society.
    5. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2002. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 73-112, February.
    6. Irina A. Telyukova & Randall Wright, 2008. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(2), pages 629-647.
    7. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    8. Lacker, Jeffrey M. & Schreft, Stacey L., 1996. "Money and credit as means of payment," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 3-23, August.
    9. Alvarez, Fernando & Atkeson, Andrew, 1997. "Money and exchange rates in the Grossman-Weiss-Rotemberg model," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 619-640, December.
    10. Mariana Rojas Breu, 2013. "The Welfare Effect Of Access To Credit," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 235-247, January.
    11. Dotsey, Michael, 1988. "The Demand for Currency in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 22-40, February.
    12. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
    13. Fumiko Hayashi & Joanna Stavins, 2012. "Effects of credit scores on consumer payment choice," Public Policy Discussion Paper 12-1, Federal Reserve Bank of Boston.
    14. Li, Geng, 2009. "Transaction costs and consumption," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1263-1277, June.
    15. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    16. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2009. "Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 851-878.
    17. Sanches, Daniel & Williamson, Stephen, 2010. "Money and credit with limited commitment and theft," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1525-1549, July.
    18. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction Services, Inflation, and Welfare," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1274-1301, December.
    19. Guerron-Quintana, Pablo A., 2009. "Money demand heterogeneity and the great moderation," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 255-266, March.
    20. Gust, Christopher & López-Salido, David, 2014. "Monetary policy and the cyclicality of risk," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 59-75.
    21. André C. Silva, 2012. "Rebalancing Frequency and the Welfare Cost of Inflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 153-183, April.
    22. Dotsey, Michael & Guerron-Quintana, Pablo A., 2016. "Interest rates and prices in an inventory model of money with credit," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 71-89.
    23. Irina A. Telyukova, 2013. "Household Need for Liquidity and the Credit Card Debt Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(3), pages 1148-1177.
    24. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2009. "Sluggish Responses of Prices and Inflation to Monetary Shocks in an Inventory Model of Money Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 911-967.
    25. Schreft, Stacey L., 1992. "Welfare-improving credit controls," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 57-72, October.
    26. Jean Boivin & Marc Giannoni, 2002. "Assessing changes in the monetary transmission mechanism: a VAR approach," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 97-111.
    27. Occhino, Filippo, 2008. "Market Segmentation And The Response Of The Real Interest Rate To Monetary Policy Shocks," Macroeconomic Dynamics, Cambridge University Press, vol. 12(5), pages 591-618, November.
    28. James X. Sullivan, 2008. "Borrowing During Unemployment: Unsecured Debt as a Safety Net," Journal of Human Resources, University of Wisconsin Press, vol. 43(2), pages 383-412.
    29. Carlos Arango & Dylan Hogg & Alyssa Lee, 2012. "Why Is Cash (Still) So Entrenched? Insights from the Bank of Canada’s 2009 Methods-of-Payment Survey," Discussion Papers 12-2, Bank of Canada.
    30. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
    31. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
    32. Glenn B. Canner & Gregory E. Elliehausen, 2013. "Consumer Experiences with Credit Cards," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 99(5), December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cociuba, Simona E. & Ramanarayanan, Ananth, 2019. "International risk sharing with endogenously segmented asset markets," Journal of International Economics, Elsevier, vol. 117(C), pages 61-78.
    2. Dotsey, Michael & Guerron-Quintana, Pablo A., 2016. "Interest rates and prices in an inventory model of money with credit," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 71-89.
    3. Raj Kumar Bera & Shyamal Kumar Mondal, 2022. "A multi-objective transportation problem with cost dependent credit period policy under Gaussian fuzzy environment," Operational Research, Springer, vol. 22(4), pages 3147-3182, September.
    4. Hazra, Devika, 2018. "Distributional role of monetary policy under limited credit access," Research in Economics, Elsevier, vol. 72(4), pages 494-510.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bernardino Adão & André C. Silva, 2021. "Government financing, inflation, and the financial sector," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1357-1396, June.
    2. Ragot, Xavier, 2014. "The case for a financial approach to money demand," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 94-107.
    3. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2009. "Sluggish Responses of Prices and Inflation to Monetary Shocks in an Inventory Model of Money Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 911-967.
    4. Choi, Hyung Sun, 2015. "Monetary policy, endogenous transactions, and financial market segmentation," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 234-251.
    5. repec:hal:spmain:info:hdl:2441/4vm8e5vhjr99cb1ekr86bivlk0 is not listed on IDEAS
    6. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2015. "Financial Innovations, Money Demand, and the Welfare Cost of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 223-261, June.
    7. Mei Dong, 2009. "Money and Costly Credit," 2009 Meeting Papers 404, Society for Economic Dynamics.
    8. English, William B., 1999. "Inflation and financial sector size," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 379-400, December.
    9. André C. Silva, 2012. "Rebalancing Frequency and the Welfare Cost of Inflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 153-183, April.
    10. Cociuba, Simona E. & Ramanarayanan, Ananth, 2019. "International risk sharing with endogenously segmented asset markets," Journal of International Economics, Elsevier, vol. 117(C), pages 61-78.
    11. Xavier Ragot & Florin O. Bilbiie, 2016. "Monetary Policy, Inflation, and Inequality: The Case for Helicopters," 2016 Meeting Papers 1663, Society for Economic Dynamics.
    12. Fernando Alvarez & Francesco Lippi & Roberto Robatto, 2019. "Cost of Inflation in Inventory Theoretical Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 206-226, April.
    13. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 715-741.
    14. Telyukova, Irina A. & Visschers, Ludo, 2009. "Precautionary Demand for Money in a Monetary Business Cycle Model," MPRA Paper 15622, University Library of Munich, Germany.
    15. Naoki Wakamori & Angelika Welte, 2017. "Why Do Shoppers Use Cash? Evidence from Shopping Diary Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(1), pages 115-169, February.
    16. Zeno Enders, 2020. "Heterogeneous Consumers, Segmented Asset Markets and the Real Effects of Monetary Policy," The Economic Journal, Royal Economic Society, vol. 130(628), pages 1031-1056.
    17. Julia K. Thomas & Aubhik Khan, 2005. "Inflation and Interest Rates with Endogenous Market Segmentation," 2005 Meeting Papers 170, Society for Economic Dynamics.
    18. Lotz, Sébastien & Zhang, Cathy, 2016. "Money and credit as means of payment: A new monetarist approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 68-100.
    19. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    20. Choi, Hyung Sun, 2014. "Money, credit, risk of loss, and limited participation," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 9-23.
    21. Tamás Briglevics & Scott Schuh, 2020. "This Is What's in Your Wallet...and Here's How You Use It," Working Papers 20-04, Department of Economics, West Virginia University.

    More about this item

    Keywords

    Segmented markets; Credit; Money;
    All these keywords.

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:83:y:2016:i:c:p:71-89. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505566 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.