Welfare Costs of Inflation, Seigniorage, and Financial Innovation
34 Pages Posted: 15 Feb 2006
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: 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
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