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Welfare Costs of Inflation, Seigniorage, and Financial Innovation


  • José De Gregorio

    (International Monetary Fund)


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.

Suggested Citation

  • José De Gregorio, 1991. "Welfare Costs of Inflation, Seigniorage, and Financial Innovation," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 675-704, December.
  • Handle: RePEc:pal:imfstp:v:38:y:1991:i:4:p:675-704

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    References listed on IDEAS

    1. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, vol. 33(1-2), pages 21-40, August.
    2. Svensson, Lars E. O., 1991. "The term structure of interest rate differentials in a target zone : Theory and Swedish data," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 87-116, August.
    3. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Sturzenegger, Federico A, 1994. "Hyperinflation with Currency Substitution: Introducing an Indexed Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 377-395, August.
    2. Samantha Johnson, 1993. "The costs of inflation revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 56, March.
    3. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, vol. 46(2), pages 317-340, April.
    4. Milesi-Ferretti, Gian Maria, 1995. "A simple model of disinflation and the optimality of doing nothing," European Economic Review, Elsevier, vol. 39(7), pages 1385-1404, August.
    5. Arrau, Patricio & de Gregorio, Jose, 1991. "Financial innovation and money demand : theory and empirical implementation," Policy Research Working Paper Series 585, The World Bank.
    6. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).

    More about this item

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General


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