Composition of Portfolio and Cost of Inflation

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

No 1403, Discussion Paper Series from Institute of Economic Research, Korea University

Abstract: The welfare cost of inflation is explored via a search-theoretic model in which along with non-interest-bearing cash, interest-bearing liquid and illiquid assets are available. With inflation, agents are willing to replace higher-return illiquid assets with lower return liquid assets for consumption purchases. The opportunity cost incurred by this adjustment turns out to have quantitatively significant implications on the cost of inflation. A parameterized version of the model suggests that the cost of 10% inflation with liquid and illiquid interest-bearing assets is almost 3 times larger than that in a cash-only model. This implies that most existing measures of inflation cost with narrow money are substantially underestimated.

Keywords: cash; narrow money; broad money; portfolio shift; inflation cost (search for similar items in EconPapers)
JEL-codes: E31 E40 E50 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:iek:wpaper:1403

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