Financial Innovations, Money Demand, and the Welfare Cost of Inflation

University of Zurich Department of Economics Working Paper No. 136

48 Pages Posted: 24 Jan 2014

See all articles by Aleksander Berentsen

Aleksander Berentsen

University of Basel - Faculty of Business and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Samuel Huber

University of Basel

Alessandro Marchesiani

University of Minho - Economic Policies Research Unit (NIPE)

Date Written: January 2014

Abstract

In the 1990s, the empirical relation between money demand and interest rates began to fall apart. We analyze to what extent improved access to money markets can explain this break-down. For this purpose, we construct a microfounded monetary model with a money market, which provides insurance against liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.S. data and find that improved access to money markets can explain the behavior of money demand very well. Furthermore, we show that, by allocating money more efficiently, better access to money markets decrease the welfare cost of inflation substantially.

Keywords: Monetary Economics

JEL Classification: E52, E58, E59

Suggested Citation

Berentsen, Aleksander and Huber, Samuel and Marchesiani, Alessandro, Financial Innovations, Money Demand, and the Welfare Cost of Inflation (January 2014). University of Zurich Department of Economics Working Paper No. 136, Available at SSRN: https://ssrn.com/abstract=2383346 or http://dx.doi.org/10.2139/ssrn.2383346

Aleksander Berentsen (Contact Author)

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Samuel Huber

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Alessandro Marchesiani

University of Minho - Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal

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