Research Paper No. 519 Optimality of Exchange Credit Restrictions
Research Paper No. 519
Optimality of Exchange Credit Restrictions.
by
Max Gillman.
May 1996
Department of Economics. University of Melbourne. Parkville Victoria
3052 Australia
ABSTRACT
The paper formalizes a conflict in the use of credit. As compared to
using costless fiat, the consumer's use of credit wastes resources by avoiding
the inflation tax through a costly means of exchange. This inefficiency
gives latitude for a planner to increase welfare by restricting exchange
credit. Governments occasionally impose such restrictions during high inflations,
when the inflation tax revenues become impaired by innovative exchange
alternatives that earn near the market interest rate. The paper demonstrates
that such restrictions on tax avoidance can be detrimental when the credit
sector also helps raise productivity. Motivated by the additional role
of credit in completing intertemporal markets, the paper finds such credit
restrictions optimal only when the cost of the inflation-tax avoidance
dominates the productivity-enhancing effects.
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