The welfare cost of inflation revisited: The role of financial innovation and household heterogeneity

Shutao Cao, Césaire A. Meh, José-Víctor Ríos-Rull and Yaz Terajima

Journal of Monetary Economics, 2021, vol. 118, issue C, 366-380

Abstract: The money-consumption ratio increases with age and decreases with consumption, and the recent era of low interest rates has seen a large increase in the aggregate money-consumption ratio. We estimate an overlapping generations model with money for transaction purposes for the age effects and the extent of financial innovation using aggregate and household-level money holdings. We then assess the welfare cost of a 3 percentage point increase in inflation, incorporating the cost from the redistribution of non-money nominal wealth. We find that the welfare costs are 13% of one-year consumption and are borne mostly by the poor and the old.

Keywords: Welfare cost of inflation; Financial innovation; Money demand (search for similar items in EconPapers)
JEL-codes: E21 E41 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: The Welfare Cost of Inflation Revisited: The Role of Financial Innovation and Household Heterogeneity (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:118:y:2021:i:c:p:366-380

DOI: 10.1016/j.jmoneco.2020.11.004

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