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Coexistence and welfare cost of inflation

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  • Lee, Manjong

Abstract

The welfare cost of inflation is studied with a model in which non-interest-bearing money coexists with an interest-bearing liquid asset. Compared to a money-only model, the presence of an interest-bearing liquid asset reduces the consumption distortion of inflation. However, it also induces the deadweight losses associated with intermediary cost and foregone return. Our result shows that the positive effect of the former is dominated by the negative effect of the latter, which suggests that existing measures of inflation cost with a money-only model would most likely be underrated.

Suggested Citation

  • Lee, Manjong, 2013. "Coexistence and welfare cost of inflation," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 23-32.
  • Handle: RePEc:eee:jmacro:v:36:y:2013:i:c:p:23-32
    DOI: 10.1016/j.jmacro.2012.12.003
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    References listed on IDEAS

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    More about this item

    Keywords

    Coexistence; Interest-bearing liquid asset; Welfare cost;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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