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On The Welfare Effects Of Credit Arrangements

Author

Listed:
  • Jonathan Chiu
  • Mei Dong
  • Enchuan Shao

Abstract

This article studies the welfare effects of credit arrangements and how these effects depend on the trading mechanism and inflation. In a competitive market, credit arrangements can be welfare reducing, because high consumption by credit users drives up the price level, reducing consumption by money users who are subject to a binding liquidity constraint. By adopting an optimal trading mechanism, however, these welfare implications can be overturned. Both price discrimination and nonlinear pricing are essential features of an optimal mechanism.

Suggested Citation

  • Jonathan Chiu & Mei Dong & Enchuan Shao, 2018. "On The Welfare Effects Of Credit Arrangements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(3), pages 1621-1651, August.
  • Handle: RePEc:wly:iecrev:v:59:y:2018:i:3:p:1621-1651
    DOI: 10.1111/iere.12315
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    References listed on IDEAS

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    1. Daniel, Sanches, 2011. "A dynamic model of unsecured credit," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1941-1964, September.
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    6. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
    7. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    8. Chao Gu & Fabrizio Mattesini & Randall Wright, 2013. "Banking: A New Monetarist Approach," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 636-662.
    9. Monnet, Cyril & Roberds, William, 2008. "Optimal pricing of payment services," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1428-1440, November.
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    Cited by:

    1. Berentsen, Aleksander & Huber, Samuel & Marchesiani, Alessandro, 2016. "The societal benefit of a financial transaction tax," European Economic Review, Elsevier, vol. 89(C), pages 303-323.
    2. Mohammad Davoodalhosseini, 2018. "Central Bank Digital Currency and Monetary Policy," Staff Working Papers 18-36, Bank of Canada.
    3. Mohammed Ait Lahcen & Pedro Gomis-Porqueras, 2018. "A model of endogenous financial inclusion: implications for inequality and monetary policy," ECON - Working Papers 310, Department of Economics - University of Zurich, revised Feb 2021.
    4. Stanislav PERCIC, 2018. "Credit expansion and social welfare in the European Union," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 10(4), pages 491-509, January.

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    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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