American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Rebalancing Frequency and the Welfare Cost of Inflation
American Economic Journal: Macroeconomics
vol. 4,
no. 2, April 2012
(pp. 153–83)
Abstract
Cash-in-advance models usually require agents to reallocate money and bonds in fixed periods. Every month or quarter, for example. I show that fixed periods underestimate the welfare cost of inflation. I use a model in which agents choose how often they exchange bonds for money. In the benchmark specification, the welfare cost of 10 percent instead of 0 inflation increases from 0.1 percent of income with fixed periods to 1 percent with optimal periods. The results are robust to different preferences, to different compositions of income in bonds or money, and to the introduction of capital and labor. (JEL: E30, E40, E50)Citation
Silva, André C. 2012. "Rebalancing Frequency and the Welfare Cost of Inflation." American Economic Journal: Macroeconomics, 4 (2): 153–83. DOI: 10.1257/mac.4.2.153Additional Materials
JEL Classification
- E30 Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
- E40 Money and Interest Rates: General
- E50 Monetary Policy, Central Banking, and the Supply of Money and Credit: General
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