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Rebalancing Frequency and the Welfare Cost of Inflation

  • André C. Silva

Cash-in-advance models usually require agents to reallocate money and bonds in fixed periods. Every month or quarter, for example. I show that fixed periods underestimate the welfare cost of inflation. I use a model in which agents choose how often they exchange bonds for money. In the benchmark specification, the welfare cost of 10 percent instead of 0 inflation increases from 0.1 percent of income with fixed periods to 1 percent with optimal periods. The results are robust to different preferences, to different compositions of income in bonds or money, and to the introduction of capital and labor. (JEL: E30, E40, E50)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.2.153
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 4 (2012)
Issue (Month): 2 (April)
Pages: 153-83

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Handle: RePEc:aea:aejmac:v:4:y:2012:i:2:p:153-83
Note: DOI: 10.1257/mac.4.2.153
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