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The cost of inflation: a mechanism design approach

  • Guillaume Rocheteau

I apply mechanism design to quantify the cost of inflation that can be attributed to monetary frictions alone. In an environment with pairwise meetings, the money demand that is consistent with a constrained-efficient allocation takes the form of a continuous correspondence that can fit the data over the period 1900-2006. For such parameterizations, the cost of moderate inflation is zero. This result is robust to different assumptions regarding the observability of money holdings, the introduction of match-specific heterogeneity, and endogeneous participation decisions.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1103.

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Date of creation: 2011
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Handle: RePEc:fip:fedcwp:1103
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