51 Pages Posted: 18 Jun 2009
Date Written: June 18, 2009
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.
Keywords: Credit cards, Outside money, Inside money, Central bank, Inflation, Stagflation
JEL Classification: D50, D51, D53, D61, E40, E50, E51, E52, E58
Suggested Citation: Suggested Citation
Geanakoplos, John and Dubey, Pradeep K., Credit Cards and Inflation (June 18, 2009). Cowles Foundation Discussion Paper No. 1709. Available at SSRN: https://ssrn.com/abstract=1421960 or http://dx.doi.org/10.2139/ssrn.1421960