Credit and inflation under borrower’s lack of commitment

Fernando Perera-Tallo ()
Authors registered in the RePEc Author Service: Antonia Díaz

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: Here 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. Defectors are banned from the credit market but they can use money balances for saving purposes. Without uncertainty, deflation crowds out credit completely. The equilibrium allocation, however, is efficient if the government deflates at the time preference rate. Efficiency can also be restored with positive inflation. For any non negative inflation rate below the optimal level, the volume of credit and the real interest rate increase with inflation. Our results hold when idiosyncratic uncertainty is introduced and households are sufficiently impatient but in one instance: efficiency cannot be restored if the deflation rate is nearby the rate of time preference. Our numerical examples suggest that the optimal inflation rate is not too large for reasonable levels of patience and risk aversion. Finally, we present a framework where the use of money arises endogenously and show that it is tantamount to our cash-in-advance framework. Our results hold in this modified environment.

Keywords: Monetary; policy; Existence; of; credit; Friedman; rule; Self-enforcing; debt; Risk; sharing (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://e-archivo.uc3m.es/rest/api/core/bitstreams ... 7ec08b69f999/content (application/pdf)

Related works:
Journal Article: Credit and inflation under borrowerʼs lack of commitment (2011)
Working Paper: Credit and Inflation under Borrowers' Lack of Commitment (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we077946

Access Statistics for this paper

More papers in UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía
Bibliographic data for series maintained by Ana Poveda ().