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Dynamic shoe-leather costs in a shopping-time model of money

  • Michael R. Pakko

A general-equilibrium shopping-time model of money demand is used to obtain estimates of some dynamic costs of inflation under alternative monetary policy rules. After examining the welfare implications of steady-state inflation, dynamic welfare costs are evaluated for inflation-targeting and price-level targeting regimes in a stochastic setting in which agents are uncertain about the underlying inflation trend. The regimes are distinguished by the presence or absence of a unit root in the money supply and the price level. Uncertainty about the underlying inflation rate is introduced as a mechanism for modeling the role of policy credibility.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-007.

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Date of creation: 1998
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Handle: RePEc:fip:fedlwp:1998-007
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  1. Casey B. Mulligan & Xavier X. Sala-i-Martin, 1997. "The Optimum Quantity of Money: Theory and Evidence," NBER Working Papers 5954, National Bureau of Economic Research, Inc.
  2. Svensson, L-E-O, 1996. "Price Level Targeting vs Inflation Targeting : A free Lunch?," Papers 614, Stockholm - International Economic Studies.
  3. Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco.
  4. Cooley, T.F. & Hansen, G.D., 1991. "The Welfare Costs of Moderate Inflations," Papers 90-04, Rochester, Business - General.
  5. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  6. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  7. David Andolfatto & Paul Gomme, 2003. "Monetary Policy Regimes and Beliefs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 1-30, February.
  8. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
  9. Imrohoroglu, Ayse, 1992. "The welfare cost of inflation under imperfect insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 79-91, January.
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