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Welfare-improving credit controls

Author Info

  • S.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.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 91-01.

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Date of creation: 1991
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Handle: RePEc:fip:fedrwp:91-01
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Keywords: Credit;

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  1. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  2. Schreft, S L, 1992. "Transaction Costs and the Use of Cash and Credit," Economic Theory, Springer, vol. 2(2), pages 283-96, April.
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Cited by:

  1. 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.
  2. 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.
  3. Stacey L. Schreft, 2006. "How and why do consumers choose their payment methods?," Research Working Paper RWP 06-04, Federal Reserve Bank of Kansas City.
  4. 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.
  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. Antoine Martin, 2002. "Endogenous multiple currencies," Research Working Paper RWP 02-03, Federal Reserve Bank of Kansas City.
  7. Jeffrey M. Lacker, 1996. "Stored value cards: costly private substitutes for currency," Working Paper 96-03, Federal Reserve Bank of Richmond.
  8. 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.
  9. Jorge Soares, 2008. "Borrowing Constraints, Parental Altruism and Welfare," Working Papers 08-12, University of Delaware, Department of Economics.
  10. 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.
  11. Martin, Antoine, 2004. "Optimal pricing of intraday liquidity," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 401-424, March.
  12. Michael Dotsey & Pablo Guerron-Quintana, 2012. "Interest rates and prices in an inventory model of money with credit," Working Papers 13-05, Federal Reserve Bank of Philadelphia.

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