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Inflation, Credit, and Indexed Unit of Account

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  • Hyung Sun Choi

    ()
    (Department of Economics, Kyung Hee University, Seoul, Republic of Korea)

  • Ohik Kwon

    ()
    (Department of Economics, Korea University, Seoul, Republic of Korea)

  • Manjong Lee

    ()
    (Department of Economics, Korea University, Seoul, Republic of Korea)

Abstract

A simple monetary model is constructed to study the implications of an indexed unit of account (Indexed-UoA). In an economy with an Indexed-UoA, credit trade friction attributed to inflation is resolved and there is no redistributional effect from unexpected inflation between debtors and creditors. However, in an economy without an Indexed-UoA, credit trades occur only if inflation is not too high and unexpected inflation renders debtors better off but creditors worse off. Adopting a medium of exchange as a unit of account is most apposite for a low-inflation economy, whereas introducing an alternative Indexed-UoA enhances welfare in an economy where inflation undermines credit trades.

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Bibliographic Info

Paper provided by Institute of Economic Research, Korea University in its series Discussion Paper Series with number 1307.

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Date of creation: 2013
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Handle: RePEc:iek:wpaper:1307

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Keywords: indexed unit of account; deferred payment; inflation; welfare;

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  1. Robert J. Shiller, 1997. "Public Resistance to Indexation: A Puzzle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 159-228.
  2. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
  3. Robert J. Shiller, 1998. "Designing Indexed Units of Account," Cowles Foundation Discussion Papers 1179, Cowles Foundation for Research in Economics, Yale University.
  4. Young Sik Kim & Manjong Lee, 2013. "Separation of Unit of Account from Medium of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1685-1703, December.
  5. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
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