Welfare Costs of Inflation, Seigniorage, and Financial innovation

Jose De Gregorio

No 1991/001, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the welfare effects of mitigating the costs of inflation. In a simple model where money reduces transaction costs, a fall in the costs of inflation is equivalent to financial innovation. This can be caused by paying interest on deposits, indexing money, or “dollarizing.” Results indicate that financial innovation raises welfare in low inflation economies while reducing it in high inflation economies, due to the offsetting indirect effect of higher inflation to finance the budget.

Keywords: WP; rate of inflation; government spending; interest rate; money demand (search for similar items in EconPapers)
Pages: 34
Date: 1991-01-01
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Journal Article: Welfare Costs of Inflation, Seigniorage, and Financial Innovation (1991)
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