Optimal monetary policy in a model of money and credit

Pedro Gomis Porqueras, Daniel R Sanches

Research output: Contribution to journalArticleResearchpeer-review

23 Citations (Scopus)

Abstract

We investigate the extent to which monetary policy can enhance the functioning of the private credit system. Specifically, we characterize the optimal return on money in the presence of credit arrangements. There is a dual role for credit: it allows buyers to trade without fiat money and also permits them to borrow against future income. However, not all traders have access to credit. As a result, there is a social role for fiat money because it allows agents to self-insure against the risk of not being able to use credit in some transactions. We consider a (nonlinear) monetary mechanism that is designed to enhance the credit system. An active monetary policy is sufficient for relaxing credit constraints. Finally, we characterize the optimal monetary policy and show that it necessarily entails a positive inflation rate.
Original languageEnglish
Pages (from-to)701 - 729
Number of pages29
JournalJournal of Money Credit and Banking
Volume45
Issue number4
DOIs
Publication statusPublished - 2013

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