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Financial Exclusion and Inflation Costs

Author

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  • Diogo Baerlocher

    (Department of Economics, University of South Florida)

Abstract

This paper constructs two models of financial exclusion to assess the welfare costs of inflation. In the first, inflation costs are measured within a classical endowment economy. The second includes a production sector and costly credit. Both models are calibrated to account for inflation costs in a high-inflation economy (developing country) and in a low-inflation economy (developed economy). In an endowment economy, when inflation is reduced from 1.5% to zero in a developed economy, the welfare costs for agents with (without) financial access are 0.36% (1.1%) consumption equivalent variation (CEV). In a model with costly credit, the welfare costs for agents with (without) financial access are 0.7% (1.36%) CEV. For developing countries, when inflation is reduced from 6.2% to zero, the welfare costs for agents with (without) financial access are 1.3% (5%) in an endowment economy. In the costly-credit model, the welfare costs for agents with (without) financial access are 0.44% (6%) CEV. The main finding is that there is a substantial asymmetry in welfare costs between individuals with and without access to financial services, especially in developing countries.

Suggested Citation

  • Diogo Baerlocher, 2023. "Financial Exclusion and Inflation Costs," Working Papers 2023-01, University of South Florida, Department of Economics.
    • Handle: RePEc:usf:wpaper:2023-01
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Exclusion; Inflation Costs; Costly Credit;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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