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Welfare-improving credit controls

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  • Stacey L. Schreft

Abstract

Credit controls are generally believed to result in an inefficient allocation of resources. This paper presents a counterexample. It displays a general equilibrium, multi-good model with spatial separation for which steady state equilibria exist in which both cash (i.e. fiat currency) and trade credit are used in exchange. Transaction costs, restrictions on the timing of trade, and a positive nominal interest rate cause the laissez-faire equilibrium to be non-optimal. A quantitative restriction on the use of trade credit can yield a Pareto superior allocation.

Suggested Citation

  • Stacey L. Schreft, 1991. "Welfare-improving credit controls," Working Paper 91-01, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:91-01
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    References listed on IDEAS

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    1. 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.
    2. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
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    Cited by:

    1. Wen, Jean-Francois & Love, David R. F., 1998. "Evaluating Tax Reforms in a Monetary Economy," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 487-508, July.
    2. Lacker, Jeffrey M. & Schreft, Stacey L., 1996. "Money and credit as means of payment," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 3-23, August.
    3. Soares, Jorge, 2015. "Borrowing constraints, parental altruism and welfare," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 1-20.
    4. Dotsey, Michael & Guerron-Quintana, Pablo A., 2016. "Interest rates and prices in an inventory model of money with credit," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 71-89.
    5. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 715-741.
    6. Martin, Antoine, 2004. "Optimal pricing of intraday liquidity," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 401-424, March.
    7. Jeffrey M. Lacker, 1996. "Stored value cards: costly private substitutes for government currency," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-25.
    8. Eden,Benjamin & Eden,Maya, 2016. "The welfare cost of inflation and the regulations of money substitutes," Policy Research Working Paper Series 7553, The World Bank.
    9. Norrbin, Stefan C. & Reffett, Kevin L., 1995. "Trade credit in a monetary economy," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 413-430, June.
    10. Stacey L. Schreft, 2005. "How and why do consumers choose their payment methods?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
    11. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
    12. Martin, Antoine, 2006. "Endogenous Multiple Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 245-262, February.
    13. Jeffrey M. Lacker, 1996. "Stored value cards: costly private substitutes for currency," Working Paper 96-03, Federal Reserve Bank of Richmond.

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    Keywords

    Credit;

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