Deposit Spreads and the Welfare Cost of Inflation

30 Pages Posted: 26 Dec 2018

Date Written: December 2018

Abstract

Since bank deposits and currency are substitutes and banks have monopoly power, higher nominal interest rates lead to higher deposit spreads. This raises the cost of transaction services, increases bank profits and attracts entry into the banking sector. Taking these effects into account, a one percentage point increase in inflation has a welfare cost of 0.086% of GDP, 6.9 times higher than traditional estimates.

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Suggested Citation

Kurlat, Pablo, Deposit Spreads and the Welfare Cost of Inflation (December 2018). NBER Working Paper No. w25385. Available at SSRN: https://ssrn.com/abstract=3306092

Pablo Kurlat (Contact Author)

Stanford University

Stanford, CA 94305
United States

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