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Welfare Costs of Inflation, Seigniorage, and Financial Innovation

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  • José De Gregorio

    (International Monetary Fund)

Abstract

The welfare effects of mitigating the costs of inflation are examined. In a model where money reduces transactions costs, a fall in inflation costs is equivalent to financial innovation. This can be caused by paying interest on deposits, indexing money, or "dollarizing." Results indicate that financial innovation raises welfare in low-inflation economies while reducing it in high-inflation economies because of the offsetting indirect effect of higher inflation to finance the budget.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 38 (1991)
Issue (Month): 4 (December)
Pages: 675-704

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Handle: RePEc:pal:imfstp:v:38:y:1991:i:4:p:675-704

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Cited by:
  1. Arrau, Patricio & de Gregorio, Jose, 1991. "Financial innovation and money demand : theory and empirical implementation," Policy Research Working Paper Series 585, The World Bank.
  2. Reinhart, Carmen & Arrau, Patricio & DeGregorio, Jose & Wickham, Peter, 1991. "The demand for money in developing countries: Assessing the role of financial innovation," MPRA Paper 13691, University Library of Munich, Germany.
  3. Federico Sturzenegger, 1992. "Hyperinflation with Currency Substitution: Introducing an Indexed Currency," NBER Working Papers 4184, National Bureau of Economic Research, Inc.
  4. Milesi-Ferretti, Gian Maria, 1995. "A simple model of disinflation and the optimality of doing nothing," European Economic Review, Elsevier, vol. 39(7), pages 1385-1404, August.
  5. Federico A. Sturzenegger, 1992. "Hyperinflation with Currency Substitution: Introducing an Indexed Currency," UCLA Economics Working Papers 657, UCLA Department of Economics.
  6. Samantha Johnson, 1993. "The costs of inflation revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 56, March.
  7. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).

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