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Costly Credit and Sticky Prices

Author

Listed:
  • Lucy Qian Liu

    (International Monetary Fund)

  • Liang Wang

    (University of Hawaii at Manoa)

  • Randall Wright

    (University of Wisconsin-Madison, FRB Chicago, FRB Minneapolis)

Abstract

We construct a model where money and credit are alternative payment instruments, use it to analyze sluggish nominal prices, and confront the data. Equilibria entail price dispersion, where sellers set nominal terms that they may keep fixed when aggregate conditions change. Buyers use cash and credit, with the former (latter) subject to inflation (transaction costs). We provide strong analytic results and exact solutions for money demand. Calibrated versions match price-change data well, with realistic durations, large average changes, many small and negative changes, a decreasing hazard, and behavior that changes with inflation, while staying consistent with macro and micro data on money and credit. Policy implications are discussed.

Suggested Citation

  • Lucy Qian Liu & Liang Wang & Randall Wright, 2015. "Costly Credit and Sticky Prices," Working Papers 201505, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:201505
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    File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_15-5.pdf
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    References listed on IDEAS

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    Cited by:

    1. Choi, Hyung Sun & Lee, Manjong, 2016. "Credit, banking, liquidity shortfall, and monetary policy," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 87-99.
    2. Han, Han & Julien, Benoît & Petursdottir, Asgerdur & Wang, Liang, 2016. "Equilibrium using credit or money with indivisible goods," Journal of Economic Theory, Elsevier, vol. 166(C), pages 152-163.
    3. Liang Wang & Randall Wright, 2016. "Are Prices Sticky and Does It Matter?," Economic Policy Paper 16-2, Federal Reserve Bank of Minneapolis.
    4. Araujo, Luis & Hu, Tai-Wei, 2018. "Optimal monetary interventions in credit markets," Journal of Economic Theory, Elsevier, vol. 178(C), pages 455-487.
    5. Gu, Chao & Wright, Randall, 2016. "Monetary mechanisms," Journal of Economic Theory, Elsevier, vol. 163(C), pages 644-657.

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    More about this item

    Keywords

    Money; Credit; Sticky Prices; Price Dispersion;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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