Download This PaperDeposit 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.
Suggested Citation: 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
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