Inflation and Financial Sector Size

William B. English

No 1996-16, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Traditionally, the cost of expected inflation has been seen as the \"shoeleather cost\" of going to the bank more often. This paper focuses on the other side of these transactions--i.e., on the increased production of financial services by financial firms. I construct a model in which households must make purchases either with cash or with costly transactions services produced by firms in the financial services sector. Higher inflation leads households to substitute purchased transactions services for money balances, increasing the size of the financial sector. A test of the model using cross-sectional data suggests that this effect is large.

Keywords: Inflation; transactions services; financial sector; money demand (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-12-04
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Citations: View citations in EconPapers (5)

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