Financial innovations, money demand, and the welfare cost of inflation

Aleksander Berentsen, Samuel Huber () and Alessandro Marchesiani ()

No 136, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: In the 1990s, the empirical relation between money demand and interest rates began to fall apart. We analyze to what extent improved access to money markets can explain this break-down. For this purpose, we construct a microfounded monetary model with a money market, which provides insurance against liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.S. data and find that improved access to money markets can explain the behavior of money demand very well. Furthermore, we show that, by allocating money more efficiently, better access to money markets decrease the welfare cost of inflation substantially.

Keywords: Monetary; economics (search for similar items in EconPapers)
JEL-codes: E52 E58 E59 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Financial Innovations, Money Demand, and the Welfare Cost of Inflation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:136

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