Title

A Credit Mechanism for Selecting a Unique Competitive Equilibrium

Document Type

Discussion Paper

Publication Date

11-1-2005

CFDP Number

1539R

CFDP Revision Date

2009-06-01

CFDP Pages

21

Abstract

The enlargement of the general-equilibrium structure to allow default subject to penalties to appririate credit limits and default penalties results in a construction of a simple mechanism for a credit using society. We show that there generically exists a price-normalizing bundle that determines a credit money along with appropriate credit limmits and default penalties for a credit mechanism to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with appropriate credit limits default penalties for the traders. This will include a CE with the minimal cash flow penalty. Such CEs are special for the reason that we minimize the need for a substitute-for-trust (i.e. money) in trade.

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