Thresholds and the Welfare Cost of Inflation

Robert Reed and Edgar Ghossoub ()
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Edgar Ghossoub: UTSA

Working Papers from College of Business, University of Texas at San Antonio

Abstract: The neoclassical growth model is the benchmark framework for studying the welfare effects of inflation. However, existing work likely produces misleading estimates because it does not include any mechanism for in?ation to promote capital accumulation and welfare. Such rigid assumptions do not line up with recent evidence of a Tobin e¤ect for advanced economies like the United States. Based upon empirical results, we present a model in which there are threshold e¤ects from in?ation to the reliance on cash. Our analysis makes considerable progress in determining the costs of in?ation by acknowledging a Tobin e¤ect occurs at low in?ation rates but trying to exploit a tradeo¤ at high rates distorts the e¢ ciency of the payments system with strong adverse consequences for the capital stock and welfare.

Keywords: Payments System; Money Demand; Capital Accumulation; In?ation (search for similar items in EconPapers)
JEL-codes: E31 E41 E52 O42 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2013-12-09
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