Rebalancing Frequency and the Welfare Cost of Inflation

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

FEUNL Working Paper Series No. 587

50 Pages Posted: 6 Jul 2014

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 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 (April 2012). American Economic Journal: Macroeconomics, 2012, 4(2): 153-183, FEUNL Working Paper Series No. 587, Available at SSRN: https://ssrn.com/abstract=2462544

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
7
Abstract Views
195
PlumX Metrics