Coexistence and welfare cost of inflation

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Abstract

The welfare cost of inflation is studied with a model in which non-interest-bearing money coexists with an interest-bearing liquid asset. Compared to a money-only model, the presence of an interest-bearing liquid asset reduces the consumption distortion of inflation. However, it also induces the deadweight losses associated with intermediary cost and foregone return. Our result shows that the positive effect of the former is dominated by the negative effect of the latter, which suggests that existing measures of inflation cost with a money-only model would most likely be underrated.

Original languageEnglish
Pages (from-to)23-32
Number of pages10
JournalJournal of Macroeconomics
Volume36
DOIs
Publication statusPublished - 2013 Jun 1

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Keywords

  • Coexistence
  • Interest-bearing liquid asset
  • Welfare cost

ASJC Scopus subject areas

  • Economics and Econometrics

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