Welfare Costs of Inflation, Seigniorage, and Financial innovation
January 1, 1991
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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
Pages:
34
Volume:
1991
DOI:
Issue:
001
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.
