Welfare-Improving Credit Controls

27 Pages Posted: 6 Nov 2012

See all articles by Stacey Schreft

Stacey Schreft

Government of the United States of America - Office of Financial Research

Date Written: January 1, 1991

Abstract

Credit controls are generally believed to result in an inefficient allocation of resources. This paper presents a counterexample. It displays a general equilibrium, multi-good model with spatial separation for which steady state equilibria exist in which both cash (i.e. fiat currency) and trade credit are used in exchange. Transaction costs, restrictions on the timing of trade, and a positive nominal interest rate cause the laissez-faire equilibrium to be non-optimal. A quantitative restriction on the use of trade credit can yield a Pareto superior allocation.

Suggested Citation

Schreft, Stacey L., Welfare-Improving Credit Controls (January 1, 1991). Federal Reserve Bank of Richmond Working Paper No. 91-1. Available at SSRN: https://ssrn.com/abstract=2127225 or http://dx.doi.org/10.2139/ssrn.2127225

Stacey L. Schreft (Contact Author)

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

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