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Credit and Inflation under Borrowers' Lack of Commitment

Author

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  • Fernando Perera-Tallo

    (Universidad de La Laguna)

  • Antonia Diaz

    (Universidad Carlos III de Madrid)

Abstract

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.

Suggested Citation

  • Fernando Perera-Tallo & Antonia Diaz, 2007. "Credit and Inflation under Borrowers' Lack of Commitment," 2007 Meeting Papers 429, Society for Economic Dynamics.
  • Handle: RePEc:red:sed007:429
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    References listed on IDEAS

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    1. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, pages 1257-1291.
    2. Edward J. Green & Ruilin Zhou, 2005. "Money As A Mechanism In A Bewley Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 351-371, May.
    3. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
    4. Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, pages 179-193.
    5. Christian Hellwig & Guido Lorenzoni, 2009. "Bubbles and Self-Enforcing Debt," Econometrica, Econometric Society, pages 1137-1164.
    6. Kehoe, Patrick J. & Perri, Fabrizio, 2004. "Competitive equilibria with limited enforcement," Journal of Economic Theory, Elsevier, pages 184-206.
    7. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005. "Heterogeneity, Redistribution, And The Friedman Rule," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 437-454, May.
    8. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-598, May.
    9. Aiyagari, S. Rao & Williamson, Stephen D., 2000. "Money and Dynamic Credit Arrangements with Private Information," Journal of Economic Theory, Elsevier, pages 248-279.
    10. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    11. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
    12. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Oxford University Press, pages 865-888.
    13. Narayana R. Kocherlakota, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 595-609.
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    Cited by:

    1. Berentsen, Aleksander & Waller, Christopher, 2011. "Outside versus inside bonds: A ModiglianiâMiller type result for liquidity constrained economies," Journal of Economic Theory, Elsevier, pages 1852-1887.
    2. Aleksander Berentsen & Christopher Waller, 2008. "Outside Versus Inside Bonds," IEW - Working Papers 372, Institute for Empirical Research in Economics - University of Zurich.
    3. repec:dau:papers:123456789/9608 is not listed on IDEAS
    4. Rojas-Breu, M., 2011. "Debt enforcement and the return on money," Working papers 345, Banque de France.
    5. Lizarazo, Sandra & Da-Rocha, Jose-Maria, 2011. "Optimal monetary policy and default," MPRA Paper 31931, University Library of Munich, Germany.

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