Inflation, Monetary Velocity, and Welfare
29 Pages Posted: 28 May 2004 Last revised: 14 Sep 2022
Date Written: September 1982
Abstract
This paper develops a simple general equilibrium model of a monetary economy with a capital market, in which monetary demand arises from a "cash-in-advance" constraint rather than from any direct role in the utility function. Uncertainty gives rise to a meaningful portfolio choice between money and bonds. We show that monetary velocity is increasing in the rate of inflation, and that the optimal monetary policy is that which maximizes real balances. We also show that the real rate of interest is not invariant to monetary policy: inflation lowers the real rate.
Suggested Citation: Suggested Citation
Krugman, Paul R. and Persson, Torsten and Svensson, Lars E.O., Inflation, Monetary Velocity, and Welfare (September 1982). NBER Working Paper No. w0987, Available at SSRN: https://ssrn.com/abstract=303482
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