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Welfare Costs of Inflation, Seigniorage, and Financial innovation

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  • Jose De Gregorio

Abstract

This paper examines the welfare effects of mitigating the costs of inflation. In a simple model where money reduces transaction costs, a fall in the costs of inflation 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, due to the offsetting indirect effect of higher inflation to finance the budget.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 91/1.

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Length: 34
Date of creation: 01 Jan 1991
Date of revision:
Handle: RePEc:imf:imfwpa:91/1

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Cited by:
  1. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen & Wickham, Peter, 1991. "The demand for money in developing countries : assessing the role of financial innovation," Policy Research Working Paper Series 721, The World Bank.
  2. Samantha Johnson, 1993. "The costs of inflation revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 56, March.
  3. Arrau, Patricio & de Gregorio, Jose, 1991. "Financial innovation and money demand : theory and empirical implementation," Policy Research Working Paper Series 585, The World Bank.
  4. Federico Sturzenegger, 1992. "Hyperinflation with Currency Substitution: Introducing an Indexed Currency," NBER Working Papers 4184, National Bureau of Economic Research, Inc.
  5. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers, Economic and Social Research Institute (ESRI) WP049, Economic and Social Research Institute (ESRI).
  6. Milesi-Ferretti, Gian Maria, 1995. "A simple model of disinflation and the optimality of doing nothing," European Economic Review, Elsevier, Elsevier, vol. 39(7), pages 1385-1404, August.
  7. Federico A. Sturzenegger, 1992. "Hyperinflation with Currency Substitution: Introducing an Indexed Currency," UCLA Economics Working Papers, UCLA Department of Economics 657, UCLA Department of Economics.

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