Transaction Costs and the Use of Cash and Credit

Stacey Schreft

Economic Theory, 1992, vol. 2, issue 2, 283-96

Abstract: An overlapping generations model with spatial separation and transaction costs is developed that displays steady state equilibria in which both cash (fiat currency) and trade credit are used in exchange. Equilibria in which trade credit is used are not Pareto optimal. The question of the optimal quantity of money is addressed. Deflation is found to be optimal, contrary to the result for standard overlapping generations environments.

Date: 1992
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