Elsevier

Games and Economic Behavior

Volume 70, Issue 2, November 2010, Pages 325-353
Games and Economic Behavior

Credit cards and inflation

https://doi.org/10.1016/j.geb.2010.02.004Get rights and content

Abstract

The introduction and widespread use of credit cards increases trading efficiency but, by also increasing the velocity of money, it causes inflation, in the absence of monetary intervention. If the monetary authority attempts to restore pre-credit card price levels by reducing the money supply, it might have to sacrifice the efficiency gains.

When there is default on credit cards, there is even more inflation, and less efficiency gains. The monetary authority might then have to accept less than pre-credit card efficiency in order to restore pre-credit card price levels, or else it will have to accept inflation if it is unwilling to cut efficiency below pre-credit card levels. This could be a source of stagflation.

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Cited by (7)

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Both authors have benefited greatly from many years of collaboration and conversation on the theory of money with Martin Shubik. It is a pleasure to dedicate this paper to him. We would also like to thank William Brainard and Michael Woodford for helpful and insightful critiques of our model.

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