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Transaction Costs and the Use of Cash and Credit


  • Schreft, S L


An overlapping generations model with spatial separation and transaction costs is developed that displays steady state equilibria in which both cash (fiat currency) and trade credit are used in exchange. Equilibria in which trade credit is used are not Pareto optimal. The question of the optimal quantity of money is addressed. Deflation is found to be optimal, contrary to the result for standard overlapping generations environments.

Suggested Citation

  • Schreft, S L, 1992. "Transaction Costs and the Use of Cash and Credit," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(2), pages 283-296, April.
  • Handle: RePEc:spr:joecth:v:2:y:1992:i:2:p:283-96

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    References listed on IDEAS

    1. Kreps, David M., 1981. "Arbitrage and equilibrium in economies with infinitely many commodities," Journal of Mathematical Economics, Elsevier, vol. 8(1), pages 15-35, March.
    2. Ross, Stephen A, 1978. "A Simple Approach to the Valuation of Risky Streams," The Journal of Business, University of Chicago Press, vol. 51(3), pages 453-475, July.
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    4. Bick, Avi, 1982. "Comments on the valuation of derivative assets," Journal of Financial Economics, Elsevier, vol. 10(3), pages 331-345, November.
    5. Avi Bick., 1982. "Comments on the Valuation of Derivative Assets," Research Program in Finance Working Papers 125, University of California at Berkeley.
    6. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    7. Jarrow, Robert A., 1986. "A characterization theorem for unique risk neutral probability measures," Economics Letters, Elsevier, vol. 22(1), pages 61-65.
    8. N/A, 1970. "Note," Review of Radical Political Economics, Union for Radical Political Economics, vol. 2(4), pages 1-1, October.
    9. Green, Richard C. & Jarrow, Robert A., 1987. "Spanning and completeness in markets with contingent claims," Journal of Economic Theory, Elsevier, vol. 41(1), pages 202-210, February.
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