Costly Credit and Sticky Prices

Lucy Qian Liu (), Liang Wang and Randall Wright

No 201505, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: We construct a model where money and credit are alternative payment instruments, use it to analyze sluggish nominal prices, and confront the data. Equilibria entail price dispersion, where sellers set nominal terms that they may keep fixed when aggregate conditions change. Buyers use cash and credit, with the former (latter) subject to inflation (transaction costs). We provide strong analytic results and exact solutions for money demand. Calibrated versions match price-change data well, with realistic durations, large average changes, many small and negative changes, a decreasing hazard, and behavior that changes with inflation, while staying consistent with macro and micro data on money and credit. Policy implications are discussed.

Keywords: Money; Credit; Sticky Prices; Price Dispersion (search for similar items in EconPapers)
JEL-codes: E31 E42 E51 E52 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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