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Endogenous Money, Inflation and Welfare

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Author Info

  • Espen Henriksen

    (University of Oslo)

  • Finn Kydland

    (University of California, Santa Barbara)

Abstract

This paper addresses the classic question: what are the welfare costs of inflation. We employ a model in which the ratios of currency to deposits and currency to reserves are endogenously determined. The model distinguishes quantitatively between three sources of welfare cost of inflation, and provides further estimates for potential welfare gains from improvements in transaction technologies. Estimates of the marginal cost of public funds associated with the inflation tax are compared both with that of labor taxation within the model and with those reported in the public finance and macro literature. We conclude that not only is inflation an inefficient source of government revenue, but also that, in the absence of lump-sum taxation, deflationary policies may be highly inefficient. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.09.003
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 13 (2010)
Issue (Month): 2 (April)
Pages: 470-486

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Handle: RePEc:red:issued:07-125

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Related research

Keywords: Endogenous money; Welfare cost of inflation; Transaction technologies; Seigniorage; Marginal cost of public funds;

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  1. Seater, John J., 1985. "On the construction of marginal federal personal and social security tax rates in the U.S," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 121-135, January.
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Cited by:
  1. H. Murat Ozbilgin, 2010. "Welfare Gains from Disinflation in an Economy With Currency Substitution (Para Ikamesinin Oldugu Bir Ekonomide Enflasyonun Dusurulmesinden Kaynaklanan Refah Kazanimlari)," Working Papers 1009, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  2. Yi Wen, 2012. "Liquidity and welfare," Working Papers 2012-037, Federal Reserve Bank of St. Louis.

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