Cash, Checkable Deposits and Cost of Inflation

34 Pages Posted: 22 Jan 2015 Last revised: 5 Dec 2017

See all articles by Manjong Lee

Manjong Lee

Korea University - Department of Economics

Sung Guan Yun

The Bank of Korea

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Date Written: March 9, 2013

Abstract

The Welfare cost of inflation is revisited with a search-theoretic model wherein distinct features of cash and checkable deposits as means of payment are incorporated. Our result implies that the presence of an interest-bearing checkable deposit amplifies the cost of inflation significantly via a channel of option value of money.

Put differently, the cost of inflation is substantially underestimated under the assumption of non-interest-bearing M1. This is in stark contrast to the previous studies in which the assumption of non-interest-bearing M1 leads to a considerable overvaluation of an inflation cost. This finding provides the rationale for a low inflation target by the central bank where the payment system is highly developed.

Keywords: cash, interest-bearing checkable deposit, cost of inflation

JEL Classification: E31, E41, E51

Suggested Citation

Lee, Manjong and Yun, Sung Guan, Cash, Checkable Deposits and Cost of Inflation (March 9, 2013). Bank of Korea WP 2013-3, Available at SSRN: https://ssrn.com/abstract=2553672 or http://dx.doi.org/10.2139/ssrn.2553672

Manjong Lee (Contact Author)

Korea University - Department of Economics ( email )

1 Anam-dong 5 ka
Seoul, 136-701
+82-2-3290-2223 (Phone)
+82-2-3290-2200 (Fax)

Sung Guan Yun

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

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