They find that the availability of credit substantially changes the dynamics in the model, allowing agents to significantly smooth consumption and reduce the movements in velocity. As a result, prices become quite flexible and liquidity effects are dampened. Thus, adding another medium of exchange whose use is calibrated to U.S. data has important implications for economic behavior in a segmented markets model.View the Full Working Paper
Interest Rates and Prices in an Inventory Model of Money with Credit
WP 13-5 - Using a segmented market model that includes state-dependent asset market decisions along with access to credit, the authors analyze the impact that transactions credit has on interest rates and prices.