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Optimal Inflation in a Model of Inside Money: a Further Result

Wataru Nozawa and Hoonsik Yang ()
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Hoonsik Yang: Department of Economics and Trade, Sejong University

Annals of Economics and Finance, 2018, vol. 19, issue 1, 137-150

Abstract: We extend the Deviatov and Wallace (2014) model of inside money in which they find some examples where inflation is beneficial. Their model was restrictive in that it could not address policies that provide interests on cash due to the small upper bound on money holdings. With a higher upper bound on money holdings, such policies can be engineered without inflation, and it is uncertain whether inflation is necessary for the optima. We investigate this possibility and confirm their results in a more generalized setting. At the optima, interest on cash is not provided, and positive inflation arises in a similar manner to Deviatov and Wallace (2014).

Keywords: Friedman rule; inside-money; inflation; monitoring; optima (search for similar items in EconPapers)
JEL-codes: E31 E42 E50 E52 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:cuf:journl:y:2018:v:19:i:1:nozawa:yang