Credit Cards and Inflation
Yale University - Cowles Foundation
Pradeep K. Dubey
SUNY Stony Brook - Center for Game Theory in Economics
June 18, 2009
Cowles Foundation Discussion Paper No. 1709
The introduction and widespread use of credit cards increases trading efficiency but, by also increasing the velocity of money, it causes inflation, in the absence of monetary intervention. If the monetary authority attempts to restore pre-credit card price levels by reducing the money supply, it might have to sacrifice the efficiency gains. When there is default on credit cards, there is even more inflation, and less efficiency gains. The monetary authority might then have to accept less than pre-credit card efficiency in order to restore pre-credit card price levels, or else it will have to accept inflation if it is unwilling to cut efficiency below pre-credit card levels. This could be a source of stagflation.
Number of Pages in PDF File: 51
Keywords: Credit cards, Outside money, Inside money, Central bank, Inflation, Stagflation
JEL Classification: D50, D51, D53, D61, E40, E50, E51, E52, E58
Date posted: June 18, 2009
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