Welfare Costs of Inflation, Seigniorage, and Financial Innovation

34 Pages Posted: 15 Feb 2006

See all articles by Jose de Gregorio

Jose de Gregorio

Central Bank of Chile; Universidad de Chile; National Bureau of Economic Research (NBER)

Date Written: January 1991

Abstract

This paper examines the welfare effects of mitigating the costs of inflation. In a simple model where money reduces transaction costs, a fall in the costs of inflation is equivalent to financial innovation. This can be caused by paying interest on deposits, indexing money, or "dollarizing." Results indicate that financial innovation raises welfare in low inflation economies while reducing it in high inflation economies, due to the offsetting indirect effect of higher inflation to finance the budget.

JEL Classification: 310, 320

Suggested Citation

de Gregorio, Jose, Welfare Costs of Inflation, Seigniorage, and Financial Innovation (January 1991). IMF Working Paper No. 91/1, Available at SSRN: https://ssrn.com/abstract=884505

Jose De Gregorio (Contact Author)

Central Bank of Chile ( email )

Agustinas 1180
Santiago
Chile

Universidad de Chile ( email )

Ministry of Finance Teatinos l20 - Piso l2
Santiago
Chile

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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