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Deposit Spreads and the Welfare Cost of Inflation

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  • Pablo Kurlat

    (Stanford)

Abstract

Since bank deposits and currency are substitutes and banks have monopoly power, higher nominal interest rates lead to higher deposit spreads. This raises the cost of transaction services, increases bank profits and attracts entry into the banking sector. Taking these effects into account, a one percentage point increase in inflation has a welfare cost of 0.086% of GDP, 6.9 times higher than traditional estimates.

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  • Pablo Kurlat, 2019. "Deposit Spreads and the Welfare Cost of Inflation," 2019 Meeting Papers 211, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:211
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    References listed on IDEAS

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    Cited by:

    1. Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2019. "Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment," Staff Working Papers 19-20, Bank of Canada.
    2. Kurlat, Pablo, 2019. "Deposit spreads and the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 78-93.
    3. Serletis, Apostolos & Xu, Libo, 2021. "The welfare cost of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 128(C).
    4. Dirk Niepelt, 2020. "Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics," Working Papers 20.05, Swiss National Bank, Study Center Gerzensee.
    5. Janet Hua & Yu Zhu, 2021. "Monetary Policy Pass-Through with Central Bank Digital Currency," Staff Working Papers 21-10, Bank of Canada.
    6. Javier Garcia Cicco & Patricio Goldstein & Federico Sturzenegger, 2023. "Permanent and Transitory Monetary Shocks around the World," Working Papers 275, Red Nacional de Investigadores en Economía (RedNIE).
    7. Cynthia Balloch & Yann Koby & Mauricio Ulate, 2022. "Making Sense of Negative Nominal Interest Rates," Working Paper Series 2022-12, Federal Reserve Bank of San Francisco.
    8. Dirk Niepelt, 2022. "Money and Banking with Reserves and CBDC," Diskussionsschriften dp2212, Universitaet Bern, Departement Volkswirtschaft.
    9. Dai, Wei & Serletis, Apostolos, 2019. "On the Markov switching welfare cost of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    10. Serletis, Apostolos & Xu, Libo, 2023. "Consumer preferences, the demand for Divisia money, and the welfare costs of inflation," Journal of Macroeconomics, Elsevier, vol. 75(C).
    11. Li, Jiaqi, 2023. "Predicting the demand for central bank digital currency: A structural analysis with survey data," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 73-85.
    12. Jonathan Chiu & Janet Hua Jiang & Seyed Mohammadreza Davoodalhosseini & Yu Zhu, 2019. "Central Bank Digital Currency and Banking," 2019 Meeting Papers 862, Society for Economic Dynamics.
    13. Luca Benati & Juan-Pablo Nicolini, 2019. "The Welfare Costs of Inflation," Diskussionsschriften dp1911, Universitaet Bern, Departement Volkswirtschaft.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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