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Inflation and Social Welfare in a Model With Endogenous Financial Adaptation

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  • Federico Sturzenegger
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    Abstract

    This paper develops a model with endogenous financial adaptation. With a representative agent, inflation and welfare increase upon introduction of financial adaptation. Once we allow for agents' heterogeneity, we can show that inflation still increases and that the "poor" are hurt, while the "rich" benefit from the process of financial adaptation. Finally, we consider the optimal level of seigniorage collection. With a representative agent, financial adaptation increases both the optimal level of government spending and the inflation rate. With heterogeneous agents, if the government cares for the low income group, the optimal amount of government spending falls even though the rate of inflation increases. The model accounts for many stylized facts of high inflation economies and explains the incentives behind many policy actions.

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    File URL: http://www.nber.org/papers/w4103.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4103.

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    Date of creation: Jun 1992
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    Handle: RePEc:nbr:nberwo:4103

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    1. Calvo, Guillermo A., 1985. "Currency substitution and the real exchange rate: the utility maximization approach," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 175-188, June.
    2. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July.
    3. repec:fth:harver:1508 is not listed on IDEAS
    4. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
    5. Liviatan, Nissan, 1981. "Monetary Expansion and Real Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1218-27, December.
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    Cited by:
    1. Manoel Bittencourt, 2008. "Macroeconomic Performance and Inequality: Brazil 1983-1994," Working Papers 101, Economic Research Southern Africa.
    2. Pelin Berkmen & Eduardo A. Cavallo, 2007. "Exchange Rate Policy and Liability Dollarization," IMF Working Papers 07/33, International Monetary Fund.
    3. Guillermo Mondino & Federico Sturzenegger & Mariano Tommasi, 1992. "Recurrent High Inflation and Stabilization, A Dynamic Game," UCLA Economics Working Papers 678, UCLA Department of Economics.
    4. Kane, Cheikh & Morisett, Jacques, 1993. "Who would vote for inflation in Brazil? : an integrated framework approach to inflation and income distribution," Policy Research Working Paper Series 1183, The World Bank.
    5. Ould Ahmed, Pepita & Marques-Pereira, Jaime & Le Maux, Laurent & Desmedt, Ludovic & Blanc, Jerome & Théret, Bruno, 2013. "Monetary plurality in economic theory," Economics Papers from University Paris Dauphine 123456789/11496, Paris Dauphine University.
    6. Filho, Irineu de Carvalho & Chamon, Marcos, 2012. "The myth of post-reform income stagnation: Evidence from Brazil and Mexico," Journal of Development Economics, Elsevier, vol. 97(2), pages 368-386.
    7. Martin Uribe, 1995. "Hysteresis in a simple model of currency substitution," International Finance Discussion Papers 509, Board of Governors of the Federal Reserve System (U.S.).
    8. Miguel Lebre de Freitas, 2003. "The dynamics of inflation and currency substitution in a small open economy," Working Papers de Economia (Economics Working Papers) 02, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro, revised Aug 2003.
    9. Steven B. Kamin & Neil R. Ericsson, 1993. "Dollarization in Argentina," International Finance Discussion Papers 460, Board of Governors of the Federal Reserve System (U.S.).
    10. Irineu E. Carvalho Filho & Marcos Chamon, 2008. "The Myth of Post-Reform Income Stagnation," IMF Working Papers 08/197, International Monetary Fund.

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