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Money, Credit and Default

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Author Info
Sandra Lizarazo () (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
Jose Maria Da-Rocha () (Facultade de Ciencias Económicas e Empresariais, Universidade de Vigo)

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Abstract

This paper develops a quantitative model of unsecured debt, default, and money demand for heterogenous agents economies. The paper generates a theory of money demand for the case in which money is a dominate asset that is not needed to carry-out transactions. In this environment holding money helps the agents to smooth their consumption during those periods in which they are excluded from credit markets following a default in their debts. In the model the welfare of the individuals is affected by the inflation rate: high inflation rates preclude individuals of using money as an asset that helps them smooth their consumption profile but low inflation rates tend to make softer the punishment for default making it diffcult to sustain high levels of debt at equilibrium. This two opposite effects imply that in equilibrium the inflation rate that maximizes individuals welfare is positive but not too high.

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File URL: http://allman.rhon.itam.mx/~ddomingue/research/sandra/moneycreditdefault.pdf
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Publisher Info
Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0906.

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Length: 12 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:cie:wpaper:0906

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Related research
Keywords: Default; Inflation; Money; Endogenous Borrowing Constraint;

Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, vol. 97(1), pages 402-418, March. [Downloadable!]
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  2. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September. [Downloadable!] (restricted)
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  3. Jafarey, Saqib & Rupert, Peter, 2001. "Limited Commitment, Money, and Credit," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 22-58, July. [Downloadable!] (restricted)
  4. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August. [Downloadable!] (restricted)
    Other versions:
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This page was last updated on 2009-11-25.

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