Rebalancing Frequency and the Welfare Cost of Inflation

48 Pages Posted: 13 Sep 2009 Last revised: 21 Jun 2011

See all articles by Andre C. Silva

Andre C. Silva

Nova School of Business and Economics

Multiple version iconThere are 3 versions of this paper

Date Written: June 1, 2011


Cash-in-advance models usually require agents to reallocate money and bonds in fixed periods, every month or quarter, for example. I show that fixed periods underestimate the welfare cost of inflation. I use a model in which agents choose how often they exchange bonds for money. In the benchmark specification, the welfare cost of ten percent instead of zero inflation increases from 0.1 percent of income with fixed periods to one percent with optimal periods. The results are robust to different preferences, to different compositions of income in bonds or money, and to the introduction of capital and labor.

Keywords: portfolio rebalancing frequency, welfare cost of inflation, money demand, cash-in-advance models, market segmentation.

JEL Classification: E3, E4, E5.

Suggested Citation

Silva, Andre C., Rebalancing Frequency and the Welfare Cost of Inflation (June 1, 2011). Available at SSRN: or

Andre C. Silva (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Carcavelos, 2775-405


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