Endogenous Money, Inflation and Welfare

Espen Henriksen and Finn Kydland

Review of Economic Dynamics, 2010, vol. 13, issue 2, 470-486

Abstract: This paper addresses the classic question: what are the welfare costs of inflation. We employ a model in which the ratios of currency to deposits and currency to reserves are endogenously determined. The model distinguishes quantitatively between three sources of welfare cost of inflation, and provides further estimates for potential welfare gains from improvements in transaction technologies. Estimates of the marginal cost of public funds associated with the inflation tax are compared both with that of labor taxation within the model and with those reported in the public finance and macro literature. We conclude that not only is inflation an inefficient source of government revenue, but also that, in the absence of lump-sum taxation, deflationary policies may be highly inefficient. (Copyright: Elsevier)

Keywords: Endogenous money; Welfare cost of inflation; Transaction technologies; Seigniorage; Marginal cost of public funds (search for similar items in EconPapers)
JEL-codes: E31 E40 E63 H20 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (14)

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DOI: 10.1016/j.red.2009.09.003

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