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Money, trade credit and asset prices

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Author Info
Jeffrey M. Lacker
Stacey L. Schreft

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Abstract

We describe a stochastic economic environment in which the mix of money and trade credit used as means of payment is endogenous. The economy has an infinite horizon, spatial separation and a credit-related transaction cost, but no capital. We find that the equilibrium prices of arbitrary contingent claims to future currency differ from those from one-good cash-in-advance models. This anomaly is directly related to the endogeneity of the mix of media of exchange used. In particular, nominal interest rates affect the risk-free real rate of return. The model also has implications for some long-standing issues in monetary policy and for time series analysis using money and trade credit.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 91-04.

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Date of creation: 1991
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Handle: RePEc:fip:fedrwp:91-04

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Related research
Keywords: Money ; Prices ; Credit;

References listed on IDEAS
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  1. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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