Postprint version. Published in Journal of Economic Dynamics and Control, Volume 23, Issue 5-6, April 1, 1999, pages 851-872.
Copyright © 1999 Elsevier.
NOTE: At the time of publication, the author Eric O'N. was not yet affiliated with Cal Poly.
The definitive version is available at http://dx.doi.org/10.1016/S0165-1889(98)00046-3.
Extending Ireland's (1994) model, this paper analyzes an international economy where cash or credit can be used for payment. Foreign trade credit is more costly than its domestic analog. A depreciation of the real exchange rate is associated with an external surplus and a reduced share of imports purchased with credit. Economic growth slows when foreign trade credit becomes the predominant means of payment for international transactions. A country with high inflation exports its Tobin effect and thus temporarily increases world growth.