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Avoiding The Inflation Tax

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Author Info
Huberto M. Ennis

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Abstract

I study the effects of inflation on the purchasing behavior of buyers in the Lagos-Wright monetary economy. The standard framework fails to capture the long-standing intuition that when inflation increases, agents try to spend their money holdings speedily. I propose a simple, realistic extension in which buyers can rebalance their money holdings only sporadically (i.e., not every period). I show that, in such a case, higher inflation can induce buyers to spend their money faster by frontloading their consumption and searching more intensively for transactions. These trade distortions have, traditionally, been associated with the economic costs of inflation. Copyright © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-2354.2009.00542.x
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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 50 (2009)
Issue (Month): 2 (05)
Pages: 607-625
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Handle: RePEc:ier:iecrev:v:50:y:2009:i:2:p:607-625

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  2. Stephen Williamson, 2004. "Search, Limited Participation, and Monetary Policy," 2004 Meeting Papers 214, Society for Economic Dynamics. [Downloadable!]
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  3. Jonathan Chiu, 2005. "Endogenously Segmented Asset Market in an Inventory Theoretic Model of Money Demand," 2005 Meeting Papers 108, Society for Economic Dynamics. [Downloadable!]
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  4. Allen Head & Alok Kumar, 2005. "Price Dispersion, Inflation, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 533-572, 05. [Downloadable!] (restricted)
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  5. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  6. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-77, June. [Downloadable!] (restricted)
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  8. Thomas M. Humphrey, 1993. "The origins of velocity functions," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-18. [Downloadable!]
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  10. Ricardo Lagos & Guillaume Rocheteau, 2005. "Inflation, Output, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 495-522, 05. [Downloadable!] (restricted)
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  11. Brian Peterson & Shouyong Shi, 2004. "Money, price dispersion and welfare," Economic Theory, Springer, vol. 24(4), pages 907-932, November. [Downloadable!] (restricted)
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  12. Pedro Teles & Ruilin Zhou, 2005. "A stable money demand: Looking for the right monetary aggregate," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 50-63. [Downloadable!]
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  24. Alvarez, Fernando & Atkeson, Andrew, 1997. "Money and exchange rates in the Grossman-Weiss-Rotemberg model," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 619-640, December. [Downloadable!] (restricted)
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  1. Jonathan Chiu & Miguel Molico, 2008. "Uncertainty, Inflation, and Welfare," Working Papers 08-13, Bank of Canada. [Downloadable!]
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