It is argued that inflation creates private incentives for (socially costly) inside money to supplant (socially costless) outside money. Consequently, the familiar 'shoe leather cost' of inflation, that operates through a reduced demand for money under inflation, is supplemented by a separate social cost of inflation that operates through an increased supply of (inside) money under inflation. It is further argued that allowance of the costliness of an inflation-induced expansion of inside money changes the character of the distribution of the costs of inflation. Certain suppliers of inside money may experience a net gain from an inflation. The upshot is that inflation is no longer necessarily a 'common enemy', but may be welcomed by some economic interests.
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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANUCBE School of Economics Working Papers with number
2007-486.
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Find related papers by JEL classification: E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
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