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Welfare costs of inflation when interest-bearing deposits are disregarded: A calculation of the bias

Rubens Cysne () and David Turchick

No 700, Economics Working Papers (Ensaios Economicos da EPGE) from FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil)

Abstract: Most estimates of the welfare costs of in ation are devised considering only noninterest- bearing assets, ignoring that since the 80 s technological innovations and new regu- lations have increased the liquidity of interest-bearing deposits. We investigate the resulting bias. Su¢ cient and necessary conditions on its sign are presented, along with closed-form expressions for its magnitude. Two examples dealing with bidimen- sional bilogarithmic money demands show that disregarding interest-bearing monies may lead to a non-negligible overestimation of the welfare costs of in ation. An intu- itive explanation is that such assets may partially make up for the decreased demand of noninterest-bearing assets due to higher in ation.

New Economics Papers: this item is included in nep-mon
Date: 2010-01-07
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