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Avoiding the inflation tax

  • Huberto M. Ennis

I study the effects of inflation on the purchasing behavior of buyers in the Lagos-Wright monetary economy. The standard framework fails to capture the long-standing intuition that when inflation increases, agents try to spend their money holdings speedily. I propose a simple, realistic extension in which buyers can rebalance their money holdings only sporadically (i.e., not every period). I show that, in such a case, higher inflation can induce buyers to spend their money faster by frontloading their consumption and searching more intensively for transactions. These trade distortions have, traditionally, been associated with the economic costs of inflation. Copyright � (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 05-10.

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Date of creation: 2005
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Handle: RePEc:fip:fedrwp:05-10
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