Welfare Costs of Inflation, Seigniorage, and Financial Innovation
The welfare effects of mitigating the costs of inflation are examined. In a model where money reduces transactions costs, a fall in inflation costs is equivalent to financial innovation. This can be caused by paying interest on deposits, indexing money, or "dollarizing." Results indicate that financial innovation raises welfare in low-inflation economies while reducing it in high-inflation economies because of the offsetting indirect effect of higher inflation to finance the budget.
Volume (Year): 38 (1991)
Issue (Month): 4 (December)
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