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The Joint and Several Effects of Liquidity Constraints, Financing Constraints, and Financial Intermediation on the Welfare Cost of Inflation

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  • Marquis, Milton-H

    (FL State U)

Abstract

This paper examines two features of modern economies that are often overlooked when formally considering the welfare costs of inflation. The first is the short-term financing requirements of firms, and the second is the joint roles played by banks in providing valued liquidity services to households and in acting as financial intermediaries. Measured welfare losses of moderate inflation are seen to become quite large when firms finance their working capital expenses by issuing short- term debt, with estimates of those losses ranging to over 450 percent higher than is the case when these financing requirements are ignored. Banks are seen to mitigate substantially the welfare costs of inflation by lessening the distortions in household decisions, and by intermediating a larger share of short-term loans to firms as inflation increases.

Suggested Citation

  • Marquis, Milton-H, 1999. "The Joint and Several Effects of Liquidity Constraints, Financing Constraints, and Financial Intermediation on the Welfare Cost of Inflation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(2), pages 1-20, August.
    • Handle: RePEc:ime:imemes:v:17:y:1999:i:2:p:1-20
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    File URL: http://www.imes.boj.or.jp/research/papers/english/me17-2-1.pdf
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    Cited by:

    1. Özbilgin, Murat H., 2012. "Currency substitution, inflation, and welfare," Journal of Development Economics, Elsevier, vol. 99(2), pages 358-369.
    2. 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.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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