The Welfare Cost of Inflation and the Regulations of Money Substitutes

This paper studies the possibility of using financial regulation that prohibits the use of money substitutes as a tool for mitigating the adverse effects of deviations from the Friedman rule. When inflation is not too high regulation aimed at eliminating money substitutes improves welfare by economizing on transaction costs. The gains from regulation depend on the distribution of income and the level of direct taxation. The area under the demand for money curve is equal to the welfare cost of inflation only when there are no direct taxes and no proportional intermediation cost: otherwise, the area under the demand curve overstates the welfare cost of inflation when money substitutes are not important and understates the welfare cost when money substitutes are important.

Bibliographic Details

Main Authors:	Eden, Benjamin, Eden, Maya
Format:	Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2016-02
Subjects:	MONETARY POLICY, DEPOSIT, HOLDING, INCENTIVE, DURABLE GOODS, GOVERNMENT BANK, MARKET STRUCTURE, DEPOSITS, PRODUCTION, LAGS, SUPPLY CURVE, PRIVATE LENDING, INCOME, INTEREST, RATE OF RETURN, LIQUIDITY CRISES, MARGINAL COST, VELOCITY OF MONEY, MONEY SUPPLY, GOVERNMENT SPENDING, SAVINGS ACCOUNTS, INTEREST RATE, PORTFOLIO CHOICE, OPTION, EXCHANGE, GOVERNMENT REVENUES, BANKING SYSTEM, LIQUIDITY, ELASTICITY, REAL INTEREST, POLITICAL ECONOMY, REVENUES, PORTFOLIO, WELFARE, BONDS, DISTRIBUTION, LOAN, BUDGET CONSTRAINTS, TAX, INCOME TAX, SOCIAL COST, GOVERNMENT BOND, RETURNS TO SCALE, PAYMENTS, RESERVE, TRANSACTION COST, INFLATION, INTERNATIONAL BANK, LENDER, BUDGET, OPTIMUM, ECONOMIC ACTIVITY, CHOICE, LABOR MARKET, SAVINGS, DERIVATIVES, DEMAND FOR MONEY, COSTS, SHORT-TERM BONDS, MORAL HAZARD, CHECKING ACCOUNT, RESERVE BANK, DOLLAR PRICE, MONEY, CONTRACTS, LOW INTEREST RATES, TAX REGIME, CONSTANT RETURNS TO SCALE, EXCHANGE RATES, LIQUIDITY CONSTRAINTS, PRODUCTIVITY, OPTIONS, INTEREST RATES, DEPOSIT ACCOUNTS, DEBT, MARKETS, RETURN, INFLATION RATE, PUBLIC FINANCE, DEPOSIT INSURANCE, OPEN ECONOMY, BOND OPTION, POTENTIAL OUTPUT, LABOR, LOANS, TAX REVENUES, REAL INTEREST RATE, UTILITY, INVENTORY, RESERVE REQUIREMENT, FINANCE, TAXES, SAVINGS ACCOUNT, EXPENDITURE, TRANSACTIONS, RESOURCES, MARKET ECONOMY, CHECKING ACCOUNTS, TRANSACTION, CONSUMPTION, RISK NEUTRAL, BUDGET CONSTRAINT, FEDERAL RESERVE, INTEREST PAYMENTS, PRIVATE BANK, GOOD, TAX RATE, AGGREGATE SUPPLY, GOVERNMENT BUDGET, FEDERAL RESERVE BANK, FINANCIAL CRISIS, VALUE, RETURNS, NATIONAL DEBT, CREDIT, MACROECONOMICS, PRIVATE BONDS, DEMAND, UTILITY FUNCTION, INCOME DISTRIBUTION, CONTRACT, INEFFICIENCY, EXPENDITURES, CONSUMERS,
Online Access:	http://documents.worldbank.org/curated/en/2016/02/25861087/welfare-cost-inflation-regulations-money-substitutes http://hdl.handle.net/10986/23730
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