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An intra-household approach to the welfare costs of inflation

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  • Cysne, Rubens Penha

Abstract

The literature on the welfare costs of in‡ation universally assumes that the many-person household can be treated as a single economic agent. This paper explores what the heterogeneity of the agents in a household might imply for such welfare analyses. First, we show that allowing for a single-unity or for a multi-unity transacting technology impacts the money demand function and, therefore, the welfare costs of in‡ation. Second, we derive su¢cient conditions that make the welfare assessments which depart directly from the knowledge of the money demand function (as in Lucas (2000)) robust under this alternative setting. Third, we compare our general-equilibrium measure with Bailey’s (1956) partial-equilibrium one.

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  • Cysne, Rubens Penha, 2004. "An intra-household approach to the welfare costs of inflation," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 521, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  • Handle: RePEc:fgv:epgewp:521
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    1. Merton H. Miller & Daniel Orr, 1966. "A Model of the Demand for Money by Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 80(3), pages 413-435.
    2. M. Browning & P. A. Chiappori, 1998. "Efficient Intra-Household Allocations: A General Characterization and Empirical Tests," Econometrica, Econometric Society, vol. 66(6), pages 1241-1278, November.
    3. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 66(4), pages 545-556.
    4. Cysne, Rubens P, 2003. " Divisia Index, Inflation, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 221-238, April.
    5. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction Services, Inflation, and Welfare," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1274-1301, December.
    6. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 97-115, February.
    7. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, vol. 56(1), pages 63-90, January.
    8. Simonsen, Mario Henrique & Cysne, Rubens Penha, 2001. "Welfare Costs of Inflation and Interest-Bearing Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 90-100, February.
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