Welfare Gains from Disinflation in an Economy With Currency Substitution (Para Ikamesinin Oldugu Bir Ekonomide Enflasyonun Dusurulmesinden Kaynaklanan Refah Kazanimlari)
AbstractThis paper studies welfare gains from disinflation in the presence of currency substitution. A distinctive small open economy model with currency substitution and intermediated working capital is constructed for this objective. It is found that welfare gains from disinflation are higher when the baseline elasticity of substitution between foreign currency and domestic deposits is higher. Indeed the gains from disin?ation can be quite large compared to previous studies especially for moderate rates of inflation if the two assets are highly substitutable under the baseline scenario. After the benchmark economy is specified, the model is used to assess welfare gains from disinflation for a given level of financial development. The model implies that, higher currency substitution is welfare enhancing for high inflation rates but not for moderate and low inflation rates. In other words, currency substitution is not necessarily welfare enhancing.
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Bibliographic InfoPaper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1009.
Date of creation: 2010
Date of revision:
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Inflation; welfare; currency substitution; monetary policy;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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