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Welfare Costs of Inflation, Seigniorage, and Financial innovation

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  • Jose De Gregorio

Abstract

This paper examines the welfare effects of mitigating the costs of inflation. In a simple model where money reduces transaction costs, a fall in the costs of inflation is equivalent to financial innovation. This can be caused by paying interest on deposits, indexing money, or “dollarizing.” Results indicate that financial innovation raises welfare in low inflation economies while reducing it in high inflation economies, due to the offsetting indirect effect of higher inflation to finance the budget.

Suggested Citation

  • Jose De Gregorio, 1991. "Welfare Costs of Inflation, Seigniorage, and Financial innovation," IMF Working Papers 91/1, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:91/1
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    Cited by:

    1. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, vol. 46(2), pages 317-340, April.
    2. Sturzenegger, Federico A, 1994. "Hyperinflation with Currency Substitution: Introducing an Indexed Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 377-395, August.
    3. Milesi-Ferretti, Gian Maria, 1995. "A simple model of disinflation and the optimality of doing nothing," European Economic Review, Elsevier, vol. 39(7), pages 1385-1404, August.
    4. Arrau, Patricio & de Gregorio, Jose, 1991. "Financial innovation and money demand : theory and empirical implementation," Policy Research Working Paper Series 585, The World Bank.
    5. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).
    6. Samantha Johnson, 1993. "The costs of inflation revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 56, March.

    More about this item

    Keywords

    Inflation; rate of inflation; costs of inflation; inflation tax; money demand;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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