Endogenous money, inflation, and welfare

doi:10.1016/j.red.2009.09.003

Review of Economic Dynamics

Volume 13, Issue 2, April 2010, Pages 470-486

https://doi.org/10.1016/j.red.2009.09.003 Get rights and content

Abstract

This paper addresses the classic question: what are the welfare costs of inflation. We employ a model in which the ratios of currency to deposits and currency to reserves are endogenously determined. The model distinguishes quantitatively between three sources of welfare cost of inflation, and provides further estimates for potential welfare gains from improvements in transaction technologies. Estimates of the marginal cost of public funds associated with the inflation tax are compared both with that of labor taxation within the model and with those reported in the public finance and macro literature. We conclude that not only is inflation an inefficient source of government revenue, but also that, in the absence of lump-sum taxation, deflationary policies may be highly inefficient.

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^☆: We appreciate comments made at several seminars and conferences as well as the written comments by Dean Croushore, Stephen LeRoy, Roman Šustek, and the editor and two referees of this journal.

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Endogenous money, inflation, and welfare☆

Abstract

Journal of Monetary Economics

Review of Economic Dynamics

Journal of Monetary Economics

Journal of Monetary Economics

Journal of Monetary Economics

Transaction services, inflation, and welfare

Journal of Political Economy

The welfare cost of inflationary finance

Journal of Political Economy

Measuring the average marginal tax rate from the individual tax rate

Journal of Business

Average marginal tax rates on social security and the individual income tax

Journal of Business

On the marginal welfare cost of taxation

American Economic Review

Inside money, outside money and short-term interest rates

Journal of Money, Credit, and Banking