Postprint version. Published in Journal of Economic Dynamics and Control, Volume 23, Issue 5-6, April 1, 1999, pages 851-872. Copyright © 1999 Elsevier. The definitive version is available at http://dx.doi.org/10.1016/S0165-1889(98)00046-3.
NOTE: At the time of publication, the author Eric O'N. was not yet affiliated with Cal Poly.
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.