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Avoiding The Inflation Tax

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  • Huberto M. Ennis

Abstract

I study the effects of inflation on the purchasing behavior of buyers in the Lagos-Wright monetary economy. The standard framework fails to capture the long-standing intuition that when inflation increases, agents try to spend their money holdings speedily. I propose a simple, realistic extension in which buyers can rebalance their money holdings only sporadically (i.e., not every period). I show that, in such a case, higher inflation can induce buyers to spend their money faster by frontloading their consumption and searching more intensively for transactions. These trade distortions have, traditionally, been associated with the economic costs of inflation. Copyright © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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  • Huberto M. Ennis, 2009. "Avoiding The Inflation Tax," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 607-625, May.
  • Handle: RePEc:ier:iecrev:v:50:y:2009:i:2:p:607-625
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    Cited by:

    1. Nosal, Ed & Waller, Christopher J. & Wright, Randall, 2011. "Introduction To The Macroeconomic Dynamics Special Issues On Money, Credit, And Liquidity," Macroeconomic Dynamics, Cambridge University Press, pages 1-9.
    2. Dong, Mei & Jiang, Janet Hua, 2014. "Money and price posting under private information," Journal of Economic Theory, Elsevier, vol. 150(C), pages 740-777.
    3. Cordelius Ilgmann & Martin Menner, 2011. "Negative nominal interest rates: history and current proposals," International Economics and Economic Policy, Springer, pages 383-405.
    4. Chiu, Jonathan & Molico, Miguel, 2010. "Liquidity, redistribution, and the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 428-438, May.
    5. Jonathan Chiu & Miguel Molico, 2011. "Uncertainty, Inflation, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 487-512, October.
    6. Hiraguchi, Ryoji & Kobayashi, Keiichiro, 2015. "Multiplicity of monetary steady states," Economics Letters, Elsevier, vol. 127(C), pages 93-96.
    7. Stephen D. Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
    8. Liu, Lucy Qian & Wang, Liang & Wright, Randall, 2011. "On The “Hot Potato” Effect Of Inflation: Intensive Versus Extensive Margins," Macroeconomic Dynamics, Cambridge University Press, pages 191-216.
    9. Anbarci, Nejat & Dutu, Richard & Feltovich, Nick, 2015. "Inflation tax in the lab: a theoretical and experimental study of competitive search equilibrium with inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 17-33.

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