On the Welfare Effects of Credit Arrangements

31 Pages Posted: 20 Aug 2018

See all articles by Jonathan Chiu

Jonathan Chiu

Bank of Canada

Mei Dong

University of Melbourne

Enchuan Shao

University of Saskatchewan - Economics

Date Written: August 2018

Abstract

This article studies the welfare effects of credit arrangements and how these effects depend on the trading mechanism and inflation. In a competitive market, credit arrangements can be welfare reducing, because high consumption by credit users drives up the price level, reducing consumption by money users who are subject to a binding liquidity constraint. By adopting an optimal trading mechanism, however, these welfare implications can be overturned. Both price discrimination and nonlinear pricing are essential features of an optimal mechanism.

Suggested Citation

Chiu, Jonathan and Dong, Mei and Shao, Enchuan, On the Welfare Effects of Credit Arrangements (August 2018). International Economic Review, Vol. 59, Issue 3, pp. 1621-1651, 2018. Available at SSRN: https://ssrn.com/abstract=3233215 or http://dx.doi.org/10.1111/iere.12315

Jonathan Chiu (Contact Author)

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Mei Dong

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Enchuan Shao

University of Saskatchewan - Economics ( email )

9 Campus Drive
Saskatoon, Saskatchewan S7N 5A5
CANADA

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