Welfare Costs of Inflation, Seigniorage, and Financial innovation

Author/Editor:

Jose De Gregorio

Publication Date:

January 1, 1991

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.

Series:

Working Paper No. 1991/001

Subject:

Consumption Demand elasticity Demand for money Deposit rates Inflation

Notes:

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

English

Publication Date:

January 1, 1991

ISBN/ISSN:

9781451931280/1018-5941

Stock No:

WPIEA0011991

Pages:

34

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