Avoiding the Inflation Tax

29 Pages Posted: 9 Dec 2012

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2007

Abstract

I study the effects of inflation on the purchasing behavior of buyers in an economy where money is essential for certain transactions (as in Lagos and Wright, 2005). A long-standing intuition in this subject is that when inflation increases, agents try to spend their money holdings speedily. The standard framework fails to capture this kind of effect (see Lagos and Rocheteau, 2005). I propose a simple modification of the model that improves it in this dimension. I assume that buyers can rebalance their money holdings only sporadically (i.e., not every period). With this minimal change in the environment, I show that higher inflation induces some buyers to spend their money faster by frontloading their consumption, searching more intensively for transactions, and buying low-quality goods. In this way, the model is able to reproduce distortions in the pattern of transactions that, traditionally, have played an important role in the evaluation of the cost of inflation.

Keywords: money, random matching, search intensity, goods' quality

JEL Classification: E41, E31

Suggested Citation

Ennis, Huberto M., Avoiding the Inflation Tax (December 1, 2007). FRB Richmond Working Paper No. 07-06. Available at SSRN: https://ssrn.com/abstract=2186656 or http://dx.doi.org/10.2139/ssrn.2186656

Huberto M. Ennis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
23
Abstract Views
364
PlumX Metrics