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Welfare costs of inflation when interest-bearing deposits are disregarded: A calculation of the bias

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  • Cysne, Rubens Penha
  • Turchick, David

Abstract

Most estimates of the welfare costs of inflation are devised considering only noninterest-bearing assets, ignoring that since the 1980s technological innovations and new regulations have increased the liquidity of interest-bearing deposits. We investigate the resulting bias. Sufficient and necessary conditions on its sign are presented, along with closed-form expressions for its magnitude. Two examples dealing with bidimensional bilogarithmic money demands show that disregarding interest-bearing monies may lead to a non-negligible overestimation of the welfare costs of inflation. An intuitive explanation is that such assets may partially make up for the decreased demand of noninterest-bearing assets due to higher inflation.

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  • Cysne, Rubens Penha & Turchick, David, 2010. "Welfare costs of inflation when interest-bearing deposits are disregarded: A calculation of the bias," Journal of Economic Dynamics and Control, Elsevier, vol. 34(6), pages 1015-1030, June.
  • Handle: RePEc:eee:dyncon:v:34:y:2010:i:6:p:1015-1030
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    6. Manjong Lee & Sung Guan Yun, 2014. "Composition of Portfolio and Cost of Inflation," Discussion Paper Series 1403, Institute of Economic Research, Korea University.
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