Welfare Costs of Inflation, Seigniorage, and Financial innovation

January 1, 1991

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Format: Chicago

Jose De Gregorio. Welfare Costs of Inflation, Seigniorage, and Financial innovation, (USA: International Monetary Fund, 1991) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the welfare effects of mitigating the costs of inflation. In a simple model where money reduces transaction costs, a fall in the costs of inflation is equivalent to financial innovation. This can be caused by paying interest on deposits, indexing money, or “dollarizing.” Results indicate that financial innovation raises welfare in low inflation economies while reducing it in high inflation economies, due to the offsetting indirect effect of higher inflation to finance the budget.

Subject: Consumption, Demand elasticity, Demand for money, Deposit rates, Inflation

Keywords: Government spending, Interest rate, Money demand, Rate of inflation, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1991/001
Stock No:

WPIEA0011991
ISBN:

9781451931280
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 38, No. 4, December 1991.

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