On the Welfare Effects of Credit Arrangements
This paper studies the welfare effects of different credit arrangements and how these effects depend on the trading mechanism and inflation. In a competitive market, a deviation from the Friedman rule is always sub-optimal. Moreover, credit arrangements can be welfare-reducing, because increased consumption by credit users will drive up the price level so that money users have to reduce consumption when facing a binding liquidity restraint. By adopting an optimal trading mechanism, however, these welfare implications can be overturned. Price discrimination under the optimal mechanism helps internalize the price effects. First, small deviations from the Friedman rule are no longer welfare-reducing. Second, increasing the access to credit becomes welfare-improving. Finally, the model is extended to study the welfare effects of credit systems when credit serves as means of payment, and endogenous credit constraint.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada|
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
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.:
- Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
- Monnet, Cyril & Roberds, William, 2008. "Optimal pricing of payment services," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1428-1440, November.
- Tai-wei Hu & John Kennan & Neil Wallace, 2007.
"Coalition-Proof Trade and the Friedman Rule in the Lagos-Wright Model,"
NBER Working Papers
13310, National Bureau of Economic Research, Inc.
- Tai-wei Hu & John Kennan & Neil Wallace, 2009. "Coalition-Proof Trade and the Friedman Rule in the Lagos-Wright Model," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 116-137, 02.
- Kocherlakota, Narayana R., 1998.
"Money Is Memory,"
Journal of Economic Theory,
Elsevier, vol. 81(2), pages 232-251, August.
- Randall Wright & Guillame Rocheteau, 2003.
"Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium,"
666156000000000302, UCLA Department of Economics.
- 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, 01.
- Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
- Aleksander Berentsen & Gabriele Camera & Christopher Waller, .
"Money, Credit and Banking,"
IEW - Working Papers
219, Institute for Empirical Research in Economics - University of Zurich.
- Chiu, Jonathan & Meh, Césaire A., 2011.
"Financial Intermediation, Liquidity, And Inflation,"
Cambridge University Press, vol. 15(S1), pages 83-118, April.
- repec:oup:restud:v:80:y:2013:i:2:p:636-662 is not listed on IDEAS
- 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.
- Williamson, Stephen & Sanches, Daniel, 2009. "Money and Credit With Limited Commitment and Theft," MPRA Paper 20690, University Library of Munich, Germany.
- Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:12-43. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.