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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.

Suggested Citation

  • Andre C. Silva, 2014. "Rebalancing frequency and the welfare cost of inflation," Nova SBE Working Paper Series wp587, Universidade Nova de Lisboa, Nova School of Business and Economics.
  • Handle: RePEc:unl:unlfep:wp587
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    Cited by:

    1. Andre C. Silva, 2011. "Individual and aggregate money demands," Nova SBE Working Paper Series wp557, Universidade Nova de Lisboa, Nova School of Business and Economics.
    2. repec:ipg:wpaper:2014-474 is not listed on IDEAS
    3. Fernando Alvarez & Francesco Lippi & Roberto Robatto, 2019. "Cost of Inflation in Inventory Theoretical Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 206-226, April.
    4. Bernardino Adão & André C. Silva, 2021. "Government financing, inflation, and the financial sector," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1357-1396, June.
    5. André C. Silva, 2012. "Rebalancing Frequency and the Welfare Cost of Inflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 153-183, April.
    6. Miller, Stephen M. & Martins, Luis Filipe & Gupta, Rangan, 2019. "A Time-Varying Approach Of The Us Welfare Cost Of Inflation," Macroeconomic Dynamics, Cambridge University Press, vol. 23(2), pages 775-797, March.
    7. Andre Silva & Bernardino Adao, 2012. "Debt Financing," 2012 Meeting Papers 577, Society for Economic Dynamics.
    8. 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.
    9. Gillman Max, 2020. "The welfare cost of inflation with banking time," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-20, January.
    10. Bernardino Adão & André C. Silva, 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.
    11. Adão, Bernardino & Silva, André C., 2020. "The effect of firm cash holdings on monetary policy," European Economic Review, Elsevier, vol. 128(C).
    12. Bernardino Adão & André C. Silva, 2019. "Real transfers and the Friedman rule," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(1), pages 155-177, February.
    13. Bernardino Adão & André C. Silva, 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.
    14. Maio, Paulo & Silva, André C., 2020. "Asset pricing implications of money: New evidence," Journal of Banking & Finance, Elsevier, vol. 120(C).
    15. Max Gillman, 2018. "The Welfare Cost of Ináation with Banking Time," Working Papers 1014, University of Missouri-St. Louis, Department of Economics.

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    More about this item

    Keywords

    Portfolio rebalancing frequency; welfare cost of inflation; money demand; cash-in-advance models; market segmentation;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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