Cash, Checkable Deposits and Cost of Inflation

Manjong Lee and Sung Guan Lee ()
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Sung Guan Lee: Payment & Settlement Systems Department, The Bank of Korea

No 2013-3, Working Papers from Economic Research Institute, Bank of Korea

Abstract: The Welfare cost of inflation is revisited with a search-theoretic model wherein distinct features of cash and checkable deposits as means of payment are incorporated. Our result implies that the presence of an interest-bearing checkable deposit amplifies the cost of inflation significantly via a channel of option value of money. Put differently, the cost of inflation is substantially underestimated under the assumption of non-interest-bearing M1. This is in stark contrast to the previous studies in which the assumption of non-interest-bearing M1 leads to a considerable overvaluation of an inflation cost. This finding provides the rationale for a low inflation target by the central bank where the payment system is highly developed.

Keywords: cash; interest-bearing checkable deposit; cost of inflation (search for similar items in EconPapers)
JEL-codes: E31 E41 E51 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2013-03-19
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Persistent link: https://EconPapers.repec.org/RePEc:bok:wpaper:1303

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