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A Model of Money and Credit, with Application to the Credit Card Debt Puzzle

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  • Irina A. Telyukova
  • Randall Wright

Abstract

Many individuals simultaneously have significant credit card debt and money in the bank. The so-called credit card debt puzzle is, given high interest rates on credit cards and low interest rates on bank accounts, why not pay down this debt? Economists have gone to some lengths to explain this. As an alternative, we present a natural extension of the standard model in monetary economics to incorporate consumer debt, which we think is interesting in its own right, and which shows that the coexistence of debt and money in the bank is no puzzle

Suggested Citation

  • Irina A. Telyukova & Randall Wright, 2006. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," 2006 Meeting Papers 45, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:45
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    File URL: http://repec.org/sed2006/up.30503.1135265528.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Money; credit; monetary search models; credit card debt puzzle;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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