Credit and Inflation under Borrowers' Lack of Commitment

Fernando Perera-Tallo and Antonia Díaz
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Fernando Perera-Tallo: Universidad de La Laguna

No 429, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper 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. The key feature of our model is that, in the case of default, although agents are banned from the credit market, they cannot be seized their money balances. In an economy without uncertainty if the government follows the Friedman rule at the steady state agents save money to attain a completely smooth consumption path but there is no credit. If the inflation rate is positive there is credit and if it is sufficiently high agents are able to smooth completely their consumption path.

Date: 2007
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Working Paper: Credit and inflation under borrower’s lack of commitment (2007)
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