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 language | English |
|---|---|
| Pages (from-to) | 23-32 |
| Number of pages | 10 |
| Journal | Journal of Macroeconomics |
| Volume | 36 |
| DOIs | |
| Publication status | Published - 2013 Jun 1 |
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Keywords
- Coexistence
- Interest-bearing liquid asset
- Welfare cost
ASJC Scopus subject areas
- Economics and Econometrics
Cite this
Coexistence and welfare cost of inflation. / Lee, Manjong.
In: Journal of Macroeconomics, Vol. 36, 01.06.2013, p. 23-32.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Coexistence and welfare cost of inflation
AU - Lee, Manjong
PY - 2013/6/1
Y1 - 2013/6/1
N2 - 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.
AB - 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.
KW - Coexistence
KW - Interest-bearing liquid asset
KW - Welfare cost
UR - http://www.scopus.com/inward/record.url?scp=84876133854&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84876133854&partnerID=8YFLogxK
U2 - 10.1016/j.jmacro.2012.12.003
DO - 10.1016/j.jmacro.2012.12.003
M3 - Article
AN - SCOPUS:84876133854
VL - 36
SP - 23
EP - 32
JO - Journal of Macroeconomics
JF - Journal of Macroeconomics
SN - 0164-0704
ER -