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Credit and Inflation under Borrowers' Lack of Commitment

  • Fernando Perera-Tallo

    (Universidad de La Laguna)

  • Antonia Diaz

    (Universidad Carlos III de Madrid)

In this paper we investigate the existence of credit in a cash-in-advance economy where there are complete markets but for the fact that agents cannot commit to repay their debts. The key feature of our model is that, in the case of default, although agents are banned from the credit market, they cannot be seized their money balances. In an economy without uncertainty if the government follows the Friedman rule at the steady state agents save money to attain a completely smooth consumption path but there is no credit. If the inflation rate is positive there is credit and if it is sufficiently high agents are able to smooth completely their consumption path.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 429.

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Date of creation: 2007
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Handle: RePEc:red:sed007:429
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