Welfare costs of inflation when interest-bearing deposits are disregarded: a calculation of the bias

Rubens Cysne and David Turchick

No 700, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: Most estimates of the welfare costs of in ation are devised considering only noninterest- bearing assets, ignoring that since the 80s technological innovations and new regulations have increased the liquidity of interest-bearing deposits. We investigate the resulting bias. Suscient and necessary conditions on its sign are presented, along with closed-form expressions for its magnitude. Two examples dealing with bidimensional bilogarithmic money demands show that disregarding interest-bearing monies may lead to a non-negligible overestimation of the welfare costs of in ation. An intuitive explanation is that such assets may partially make up for the decreased demand of noninterest-bearing assets due to higher in ation.

Date: 2010-01-07
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (10)

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Journal Article: Welfare costs of inflation when interest-bearing deposits are disregarded: A calculation of the bias (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:700

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