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A Model of Money and Credit, with Application to the Credit Card Debt Puzzle
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Abstract
Many individuals simultaneously have significant credit card debt and money in the bank.
The so-called credit card debt puzzle is, given high interest rates on credit cards and low
interest rates on bank accounts, why not pay down this debt? Economists have gone to some
lengths to explain this. As an alternative, we present a natural extension of the standard
model in monetary economics to incorporate consumer debt, which we think is interesting
in its own right, and which shows that the coexistence of debt and money in the bank is no
puzzleMoney, credit, monetary search models, credit card debt puzzle