Rebalancing Frequency and the Welfare Cost of Inflation

Andre C. Silva ()

American Economic Journal: Macroeconomics, 2012, vol. 4, issue 2, pages 153-83

Abstract: Cash-in-advance models usually require agents to reallocate money and bonds in fixed periods. Every month or quarter, for example. I show that fixed periods underestimate the welfare cost of inflation. I use a model in which agents choose how often they exchange bonds for money. In the benchmark specification, the welfare cost of 10 percent instead of 0 inflation increases from 0.1 percent of income with fixed periods to 1 percent with optimal periods. The results are robust to different preferences, to different compositions of income in bonds or money, and to the introduction of capital and labor. (JEL: E30, E40, E50)

JEL-codes: E30 E40 E50 (search for similar items in EconPapers)
Date: 2012
Note: DOI: 10.1257/mac.4.2.153
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