IDEAS home Printed from https://ideas.repec.org/p/red/sed013/569.html
   My bibliography  Save this paper

Demand for Liquidity and Welfare Cost of Inflation by Cohort and Age of Households

Author

Listed:
  • Yaz Terajima

    (Bank of Canada)

  • Jose-Victor Rios-Rull

    (University of Minnesota)

  • Césaire Meh

    (Bank of Canada)

  • Shutao Cao

    (Bank of Canada)

Abstract

Cross-sectional data show that money holding differs significantly over household consumption and age. Liquidity demand for money (i.e., money holding per dollar of consumption) decreases as household consumption increases. It also increases with household age conditional on the level of consumption. Observed age differences in money holdings contain not only age-specific information but also cohort-specific one. Using a life-cycle model, this paper disentangles these two effects on money demand and quantifies welfare gains of reducing the long-run inflation rate. We dynamically calibrate the model to micro data and macroeconomic conditions over time. We find that, although a large part of the observed cross-sectional age differences in money demand can be accounted for by some age effects, cohort effects play a non-negligible part, supporting a presence of financial innovation. In addition, changing inflation has significantly different impacts across household groups due to their heterogeneity in money holding. When inflation increases from the 2009 level to 10%, we find the aggregate welfare loss in consumption to be 1.34%. These losses are accrued mostly by generations that are currently alive and less by future cohorts. Finally, poorer households lose more than their rich peers.

Suggested Citation

  • Yaz Terajima & Jose-Victor Rios-Rull & Césaire Meh & Shutao Cao, 2013. "Demand for Liquidity and Welfare Cost of Inflation by Cohort and Age of Households," 2013 Meeting Papers 569, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:569
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2013/paper_569.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Orazio P. Attanasio & Luigi Guiso & Tullio Jappelli, 2002. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Household Data," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 317-351, April.
    2. Heer, Burkhard & Maußner, Alfred, 2012. "The Burden Of Unanticipated Inflation: Analysis Of An Overlapping-Generations Model With Progressive Income Taxation And Staggered Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 16(02), pages 278-308, April.
    3. Chiu, Jonathan & Molico, Miguel, 2010. "Liquidity, redistribution, and the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 428-438, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed013:569. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.