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Rebalancing Frequency and the Welfare Cost of Inflation

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  • Andre C. Silva

Abstract

Cash-in-advance models usually require agents to reallocate money and bonds in fixed periods, every month or quarter, for example. I show that fixed periods underestimate the welfare cost of inflation. I use a model in which agents choose how often they exchange bonds for money. In the benchmark specification, the welfare cost of ten percent instead of zero inflation increases from 0.1 percent of income with fixed periods to one percent with optimal periods. The results are robust to different preferences, to different compositions of income in bonds or money, and to the introduction of capital and labor. JEL codes: E3, E4, E5

Suggested Citation

  • Andre C. Silva, 2014. "Rebalancing Frequency and the Welfare Cost of Inflation," FEUNL Working Paper Series wp587, Universidade Nova de Lisboa, Faculdade de Economia.
  • Handle: RePEc:unl:unlfep:wp587
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    Cited by:

    1. Stephen M. Miller & Luis F. Martins & Rangan Gupta, 2014. "A Time-Varying Approach of the US Welfare Cost of Inflation," Working Papers 201419, University of Pretoria, Department of Economics.
    2. Andre C. Silva, 2011. "Individual and Aggregate Money Demands," FEUNL Working Paper Series wp557, Universidade Nova de Lisboa, Faculdade de Economia.
    3. repec:ipg:wpaper:2014-474 is not listed on IDEAS
    4. Dotsey, Michael & Guerron-Quintana, Pablo A., 2016. "Interest rates and prices in an inventory model of money with credit," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 71-89.
    5. André C. Silva & Bernardino Adão, 2015. "Increased strength of monetary policy," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    6. Andre Silva & Bernardino Adao, 2017. "The Effect of Firm Cash Holdings on Monetary Policy," 2017 Meeting Papers 528, Society for Economic Dynamics.
    7. Andre Silva & Bernardino Adao, 2012. "Debt Financing," 2012 Meeting Papers 577, Society for Economic Dynamics.
    8. André C. Silva & Bernardino Adão, 2012. "Welfare costs of inflation with distortionary taxation," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

    More about this item

    Keywords

    portfolio rebalancing frequency; welfare cost of inflation; money demand; cash-in-advance models; market segmentation;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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