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Money and Costly Credit

Mei Dong and Stella Huangfu

Journal of Money, Credit and Banking, 2021, vol. 53, issue 6, 1449-1478

Abstract: We study an economy in which money and credit serve as a means of payment and the settlement of credit requires money. The model extends recent developments in microfounded monetary theory to address the choice of payment methods and the effects of inflation. Whether a buyer uses money or credit depends on the fixed cost of credit and the inflation rate. In particular, inflation not only makes money less valuable, but also makes credit more expensive because of the delayed settlement. The model predicts that either very low inflation or very high inflation hampers the use of credit.

Date: 2021
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Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

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