On the Optimality of Restricting Credit: Inflation Avoidance and Productivity

Abstract

The paper presents a model in which the consumer uses up resources in order to avoid the inflation tax through the use of exchange credit. In an example economy without capital, the credit tax is optimal when the resource loss from credit use dominates the productivity effect and the inefficiency of substitution towards leisure as a result of the credit tax. The paper also examines second-best inflation policy in this context, given a credit tax. It then extends the economy to an endogenous growth setting and shows how restricting inflation avoidance can increase productivity.

JEL Classification: E13, E51, E61, G21