Inflation, Monetary Velocity, and Welfare
AbstractThis paper develops a simple general equilibrium model of a monetary economy with a capital market, in which monetary demand arises from a "cash-in-advance" constraint rather than from any direct role in the utility function. Uncertainty gives rise to a meaningful portfolio choice between money and bonds. We show that monetary velocity is increasing in the rate of inflation, and that the optimal monetary policy is that which maximizes real balances. We also show that the real rate of interest is not invariant to monetary policy: inflation lowers the real rate.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0987.
Date of creation: Sep 1982
Date of revision:
Publication status: published as Krugman, Paul, Torsten Persson and Lars E.O. Svensson. "Inflation, Interest Rates, and Welfare," Quarterly Journal of Economics, Vol. 100, 1985, pp. 6 77-695.
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-03-14 (All new papers)
- NEP-CBA-2002-03-14 (Central Banking)
- NEP-MON-2002-03-14 (Monetary Economics)
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.:
- Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
- Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
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