Money And Costly Credit

We study an economy in which money and credit serve as a means of payment and the settlement of credit requires money. The model extends recent developments in microfounded monetary theory to address the choice of payment methods and the effects of inflation. Whether a buyer uses money or credit depends on the fixed cost of credit and the inflation rate. In particular, inflation not only makes money less valuable, but also makes credit more expensive because of the delayed settlement. The model predicts that either very low inflation or very high inflation hampers the use of credit.