The welfare cost of inflation and the regulations of money substitutes

Benjamin Eden () and Maya Eden ()

No 7553, Policy Research Working Paper Series from The World Bank

Abstract: This paper studies the possibility of using financial regulation that prohibits the use of money substitutes as a tool for mitigating the adverse effects of deviations from the Friedman rule. When inflation is not too high regulation aimed at eliminating money substitutes improves welfare by economizing on transaction costs. The gains from regulation depend on the distribution of income and the level of direct taxation. The area under the demand for money curve is equal to the welfare cost of inflation only when there are no direct taxes and no proportional intermediation cost: otherwise, the area under the demand curve overstates the welfare cost of inflation when money substitutes are not important and understates the welfare cost when money substitutes are important.

Keywords: Fiscal&Monetary Policy; Consumption (search for similar items in EconPapers)
Date: 2016-02-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: THE WELFARE COST OF INFLATION AND THE REGULATIONS OF MONEY SUBSTITUTES (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:7553

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