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Sticky Prices and Costly Credit

Liang Wang (), Randall Wright () and Lucy Qian Liu ()
Additional contact information
Randall Wright: University of Wisconsin - Madison, Zhejiang University, and FRB Minneapolis
Lucy Qian Liu: International Monetary Fund

No 202001, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: We develop a theory of money and credit as competing payment instruments, then put it to work in applications. Agents use cash and credit because the former (latter) is subject to the inflation tax (transaction costs). Frictions that make the choice of payment method interesting also imply equilibrium price dispersion. We derive closed- form solutions for money demand, and show how to simultaneously account for the price-change facts, cash-credit shares in micro data, and money-interest correlations in macro data. The effects of inflation on welfare, price dispersion and markups are discussed, as are nonstationary equilibria with dynamics in the price distribution.

Keywords: Money; Credit; Inflation; Price Dispersion; Sticky Prices (search for similar items in EconPapers)
JEL-codes: E31 E42 E51 E52 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-pay
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