Avoiding the Inflation Tax

Huberto Ennis

No 493, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: I study the effects of inflation on the purchasing behavior of buyers in an economy where money is essential for certain transactions (as in Lagos and Wright, 2005). A long-standing intuition in this subject is that when inflation increases, agents try to spend their money holdings more speedily. The standard framework fails to capture this kind of effect (Lagos and Rocheteau, 2005). I propose a simple modification of the model in which trading of goods and rebalancing of money holdings happen less frequently. In such a framework, I show that higher inflation induces buyers to search for transactions more intensively and buy goods of worse quality. The modification proposed also sheds new light on the connection between the search-theoretic and the inventory-theoretic models of money.

Date: 2007
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Related works:
Journal Article: AVOIDING THE INFLATION TAX (2009)
Working Paper: Avoiding the inflation tax (2007)
Working Paper: Avoiding the inflation tax (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed007:493

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