Rebalancing Frequency and the Welfare Cost of Inflation

American Economic Journal: Macroeconomics, 4(2): 153-183, 2012

Posted: 21 Aug 2013

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: April 2012

Abstract

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 10 percent instead of 0 inflation increases from 0.1 percent of income with fixed periods to 1 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: E30, E40, E50

Suggested Citation

Silva, Andre C., Rebalancing Frequency and the Welfare Cost of Inflation (April 2012). American Economic Journal: Macroeconomics, 4(2): 153-183, 2012, Available at SSRN: https://ssrn.com/abstract=2313054

Andre C. Silva (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Carcavelos, 2775-405
Portugal

HOME PAGE: http://sites.google.com/view/andredecastrosilva

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