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Money, trade credit and asset prices

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  • Jeffrey M. Lacker
  • Stacey L. Schreft

Abstract

We describe a stochastic economic environment in which the mix of money and trade credit used as means of payment is endogenous. The economy has an infinite horizon, spatial separation and a credit-related transaction cost, but no capital. We find that the equilibrium prices of arbitrary contingent claims to future currency differ from those from one-good cash-in-advance models. This anomaly is directly related to the endogeneity of the mix of media of exchange used. In particular, nominal interest rates affect the risk-free real rate of return. The model also has implications for some long-standing issues in monetary policy and for time series analysis using money and trade credit.

Suggested Citation

  • Jeffrey M. Lacker & Stacey L. Schreft, 1991. "Money, trade credit and asset prices," Working Paper 91-04, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:91-04
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    References listed on IDEAS

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    1. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-748, September.
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    Keywords

    Money ; Prices ; Credit;

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