Financial exclusion and inflation costs

Diogo Baerlocher

Economic Theory Bulletin, 2024, vol. 12, issue 1, No 8, 87-105

Abstract: Abstract This paper constructs two models of financial exclusion to assess the welfare costs of inflation. In the first, inflation costs are measured within a classical endowment economy. The second includes a production sector and costly credit. Both models are calibrated to account for inflation costs in a high-inflation economy (developing country) and in a low-inflation economy (developed economy). In an endowment economy, when inflation is reduced from 1.5% to zero in a developed economy, the welfare costs for agents with (without) financial access are 0.38% (0.43%) consumption equivalent variation (CEV). In a model with costly credit, the welfare costs for agents with (without) financial access are 0.87% (1.3%) CEV. For developing countries, when inflation is reduced from 3.2% to zero, the welfare costs for agents with (without) financial access are 0.72% (2.56%) in an endowment economy. In the costly-credit model, the welfare costs for agents with (without) financial access are 0.3% (3.1%) CEV. The main finding is that there is a substantial asymmetry in welfare costs between individuals with and without access to financial services, especially in developing countries.

Keywords: Financial exclusion; Inflation costs; Costly credit (search for similar items in EconPapers)
JEL-codes: D53 E31 E51 G23 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s40505-024-00265-x

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