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The cost of inflation: A mechanism design approach

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  • Rocheteau, Guillaume

Abstract

I apply mechanism design to quantify the cost of inflation that can be attributed to monetary frictions alone. In an environment with pairwise meetings, the money demand that is consistent with an optimal, incentive feasible allocation takes the form of a continuous correspondence that can fit the data over the period 1900–2006. For such parameterizations, the cost of moderate inflation is zero. This result is robust to the introduction of match-specific heterogeneity and endogenous participation decisions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 147 (2012)
Issue (Month): 3 ()
Pages: 1261-1279

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Handle: RePEc:eee:jetheo:v:147:y:2012:i:3:p:1261-1279

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Cost of inflation; Pairwise trades; Optimal mechanism;

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Cited by:
  1. Dong, Mei & Jiang, Janet Hua, 2014. "Money and price posting under private information," Journal of Economic Theory, Elsevier, vol. 150(C), pages 740-777.
  2. Guillaume Rocheteau, 2011. "On the coexistence of money and higher-return assets and its social role," Working Paper 1104, Federal Reserve Bank of Cleveland.
  3. Manjong Lee & Sung Guan Yun, 2014. "Composition of Portfolio and Cost of Inflation," Discussion Paper Series 1403, Institute of Economic Research, Korea University.

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