Credit Enforcement and Monetary-Policy Transmission

Markus Althanns, Hugo van Buggenum and Hans Gersbach

No 19607, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how the enforceability of credit contracts matters for the welfare effect of private-money creation and the transmission of long-run inflation. For this purpose, we write a model of directed and competitive search where sellers borrow against their future search-market income. Intermediaries transform the arising claims into private money, which buyers use alongside fiat money for search-market transactions. Inflation stimulates borrowing by curbing real interest rates. Under strong enforcement, sellers can commit ex ante to more search to enhance their future income and thus their borrowing capacity; trade therefore accelerates. Under weak enforcement, commitment is not feasible, so that the inflation-driven increase in borrowing distorts ex-post search incentives and thus decelerates trade. We calibrate the strong- and weak-enforcement economies to U.S. data. The extent of private-money creation is close to optimal in the strong-enforcement calibration, whereas private-money creation impairs welfare in the weak-enforcement calibration.

Keywords: Money creation; Credit; Financial intermediation; Directed and competitive search; Contract enforcement (search for similar items in EconPapers)
JEL-codes: E40 E50 G21 (search for similar items in EconPapers)
Date: 2024-10
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