Coexistence and welfare cost of inflation

Manjong Lee

Journal of Macroeconomics, 2013, vol. 36, issue C, 23-32

Abstract: The welfare cost of inflation is studied with a model in which non-interest-bearing money coexists with an interest-bearing liquid asset. Compared to a money-only model, the presence of an interest-bearing liquid asset reduces the consumption distortion of inflation. However, it also induces the deadweight losses associated with intermediary cost and foregone return. Our result shows that the positive effect of the former is dominated by the negative effect of the latter, which suggests that existing measures of inflation cost with a money-only model would most likely be underrated.

Keywords: Coexistence; Interest-bearing liquid asset; Welfare cost (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:36:y:2013:i:c:p:23-32

DOI: 10.1016/j.jmacro.2012.12.003

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