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Transaction services, inflation, and welfare

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Author Info
S. Rao Aiyagari
R. Anton Braun
Zvi Eckstein

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Abstract

This paper is motivated by empirical observations on the comovements of currency velocity, inflation, and the relative size of the credit services sector. We document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money. Our model makes two new contributions. First, we show that direct evidence on the appropriately defined credit service sector for the United States is consistent with the welfare cost measured using an estimated money demand schedule. Second, we provide welfare cost of inflation estimates that have some new features.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 241.

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Date of creation: 1998
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Publication status: Published in Journal of Political Economy (Vol. 106, No. 6, December 1998, pp. 1274-1301)
Handle: RePEc:fip:fedmsr:241

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Keywords: Inflation (Finance) Welfare

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393. [Downloadable!] (restricted)
  2. S. Rao Aiyagari & Zvi Eckstein, 1995. "Interpreting monetary stabilization in a growth model with credit goods production," Working Papers 525, Federal Reserve Bank of Minneapolis. [Downloadable!]
  3. Wicker, Elmus R, 1986. "Terminating Hyperinflation in the Dismembered Habsburg Monarchy," American Economic Review, American Economic Association, vol. 76(3), pages 350-64, June. [Downloadable!] (restricted)
  4. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January. [Downloadable!] (restricted)
  5. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
    Other versions:
  6. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
    Other versions:
  7. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 97-115, February. [Downloadable!] (restricted)
  8. Garber, Peter M., 1982. "Transition from inflation to price stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 16(1), pages 11-42, January. [Downloadable!] (restricted)
  9. Schreft, S L, 1992. "Transaction Costs and the Use of Cash and Credit," Economic Theory, Springer, vol. 2(2), pages 283-96, April.
  10. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May. [Downloadable!] (restricted)
    Other versions:
  11. Dotsey, Michael, 1985. " The Use of Electronic Funds Transfers to Capture the Effects of Cash Management Practices on the Demand for Demand Deposits: A Note," Journal of Finance, American Finance Association, vol. 40(5), pages 1493-1503, December. [Downloadable!] (restricted)
  12. Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco.
  13. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January. [Downloadable!] (restricted)
  14. Melnick, Rafi, 1995. "Financial Services, Cointegration, and the Demand for Money in Israel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 140-53, February. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Edward J. Green, 2001. "Central banking and the economics of information," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 28-37. [Downloadable!]
  2. Stefania Albanesi, . "Inflation and Inequality," Working Papers 199, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  3. Jeffrey M. Lacker, 1996. "Stored value cards: costly private substitutes for government currency," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-25. [Downloadable!]
  4. Stefania Albanesi, 2002. "Inflation and Inequality," Macroeconomics 0201002, EconWPA. [Downloadable!]
  5. Gillman, Max & Kejak, Michal, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Cardiff Economics Working Papers E2005/15, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
    Other versions:
  6. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Working Papers 98-15, Bank of Canada. [Downloadable!]
  7. David B. Gordon & Eric M. Leeper, 2005. "Are Countercyclical Fiscal Policies Counterproductive?," NBER Working Papers 11869, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Cysne, Rubens Penha, 2004. "An intra-household approach to the welfare costs of inflation," Economics Working Papers (Ensaios Economicos da EPGE) 521, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  9. Ben Craig & Guillaume Rocheteau, 2006. "Inflation and welfare: a search approach," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jan. [Downloadable!]
  10. Hasan Bakhshi & Ben Martin & Tony Yates, . "How uncertain are the welfare costs of inflation?," Bank of England working papers 152, Bank of England. [Downloadable!]
    Other versions:
  11. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation traps and monetary policy," Staff Report 319, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  12. Gustavo Suárez, 1999. "Tecnología De Transacciones Endógena Y Los Costos De La Inflación," BORRADORES DE ECONOMIA 003545, BANCO DE LA REPÚBLICA. [Downloadable!]
  13. Fernando M. Martin, 2004. "A Positive Theory of Government Debt," Macroeconomics 0408013, EconWPA, revised 12 Oct 2004. [Downloadable!]
  14. Max Gillman & Mark N. Harris, 2004. "Inflation, Financial Development and Endogenous Growth," Monash Econometrics and Business Statistics Working Papers 24/04, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  15. Gillman, Max & Kejak, Michal & Valentinyi, Akos, 1999. "Inflation, Growth, and Credit Services," Transition Economics Series 13, Institute for Advanced Studies. [Downloadable!]
    Other versions:
  16. R. Anton Braun & Etsuro Shioji, 2003. "Monetary Policy and the Term Structure of Interest Rates in Japan," CIRJE F-Series CIRJE-F-252, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  17. Benjamin Eden, 2007. "The Friedman Rule in an Overlapping Generations Model: Social Security in Reverse," Working Papers 0717, Department of Economics, Vanderbilt University. [Downloadable!]
  18. Benjamin Eden, 2008. "Implementing the Friedman Rule by a Government Loan Program:
    An Overlapping Generations Model
    ," Working Papers 0804, Department of Economics, Vanderbilt University. [Downloadable!]
  19. Jeffrey M. Lacker, 1996. "Stored value cards: costly private substitutes for currency," Working Paper 96-03, Federal Reserve Bank of Richmond. [Downloadable!]
  20. Cysne, Rubens Penha, 2006. "An Intra-Household Approach to the Welfare Costs of Inflation (Revised Version, Forthcoming 2006, Estudos Econômicos)," Economics Working Papers (Ensaios Economicos da EPGE) 612, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
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