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Inflation, Credit, and Indexed Unit of Account

Listed author(s):
  • Hyung Sun Choi

    ()

    (Department of Economics, Kyung Hee University, Seoul, Republic of Korea)

  • Ohik Kwon

    ()

    (Department of Economics, Korea University, Seoul, Republic of Korea)

  • Manjong Lee

    ()

    (Department of Economics, Korea University, Seoul, Republic of Korea)

A simple monetary model is constructed to study the implications of an indexed unit of account (Indexed-UoA). In an economy with an Indexed-UoA, credit trade friction attributed to inflation is resolved and there is no redistributional effect from unexpected inflation between debtors and creditors. However, in an economy without an Indexed-UoA, credit trades occur only if inflation is not too high and unexpected inflation renders debtors better off but creditors worse off. Adopting a medium of exchange as a unit of account is most apposite for a low-inflation economy, whereas introducing an alternative Indexed-UoA enhances welfare in an economy where inflation undermines credit trades.

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File URL: http://econ.korea.ac.kr/~ri/WorkingPapers/w1307.pdf
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Paper provided by Institute of Economic Research, Korea University in its series Discussion Paper Series with number 1307.

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Date of creation: 2013
Handle: RePEc:iek:wpaper:1307
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