Deposit spreads and the welfare cost of inflation
Journal of Monetary Economics, 2019, vol. 106, issue C, 78-93
High nominal interest rates are associated with high deposit spreads, which is consistent with a model where banks have monopoly power and currency and deposits are substitutes. Therefore, higher interest rates raise the implicit price of banking services, increase bank profits and attract entry into the banking sector. Taking these effects into account, a one percentage point increase in inflation has a welfare cost of 0.083% of GDP, 6.7 times higher than traditional estimates.
Keywords: Inflation; Bank deposits; Deposit spreads; Money demand (search for similar items in EconPapers)
JEL-codes: E31 E41 G21 D43 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:106:y:2019:i:c:p:78-93
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