Avoiding the inflation tax

Huberto Ennis

No 07-06, Working Paper from Federal Reserve Bank of Richmond

Abstract: I study the effects of inflation on the purchasing behavior of buyers in an economy where money is essential for certain transactions (as in Lagos and Wright, 2005). A long-standing intuition in this subject is that when inflation increases, agents try to spend their money holdings speedily. The standard framework fails to capture this kind of effect (see Lagos and Rocheteau, 2005). I propose a simple modification of the model that improves it in this dimension. I assume that buyers can rebalance their money holdings only sporadically (i.e., not every period). With this minimal change in the environment, I show that higher inflation induces some buyers to spend their money faster by frontloading their consumption, searching more intensively for transactions, and buying low-quality goods. In this way, the model is able to reproduce distortions in the pattern of transactions that, traditionally, have played an important role in the evaluation of the cost of inflation.

Keywords: Inflation (Finance); Money (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: AVOIDING THE INFLATION TAX (2009)
Working Paper: Avoiding the Inflation Tax (2007)
Working Paper: Avoiding the inflation tax (2005)
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