IDEAS home Printed from https://ideas.repec.org/a/lde/journl/y2023i98p67-95.html
   My bibliography  Save this article

Liquidity reallocation and the welfare cost of inflation in Colombia

Author

Listed:
  • Cristian Camilo Frasser-Lozano

    (Universidad del Valle)

  • Juan Camilo Pájaro-Gallego

    (Universidad del Valle)

Abstract

This article evaluates the role of liquidity reallocation via credit in mitigating the welfare cost of inflation. It presents two theoretical models: with and without liquidity reallocation. In the model with liquidity reallocation, money and credit coexist. In particular, money exhibits a double benefit: it can be used to finance consumption or to lend it to agents with liquidity needs. The latter use of money balances through credit serves to cushion the welfare cost of inflation. Both models are calibrated for the Colombian economy between 1994 and 2021, which allows us to measure the impact of inflation on welfare in terms of GDP. The welfare cost of reducing inflation by 10 percentage points without reallocating liquidity, under the Nash protocol and with bargaining power less than 1, ranges between 2.6% and 4.2% of GDP, while with liquidity reallocation it is between 0.9% and 3.6% of GDP. The welfare cost associated with positive inflation is always lower with liquidity reallocation.

Suggested Citation

  • Cristian Camilo Frasser-Lozano & Juan Camilo Pájaro-Gallego, 2023. "Liquidity reallocation and the welfare cost of inflation in Colombia," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 98, pages 67-95, January-J.
    • Handle: RePEc:lde:journl:y:2023:i:98:p:67-95
    DOI: 10.17533/udea.le.n98a348684
    as

    Download full text from publisher

    File URL: https://revistas.udea.edu.co/index.php/lecturasdeeconomia/article/view/348684
    Download Restriction: no
    File URL: https://libkey.io/10.17533/udea.le.n98a348684?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    inflation; welfare; money; credit; liquidity reallocation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lde:journl:y:2023:i:98:p:67-95. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Carlos Andrés Vasco Correa (email available below). General contact details of provider: https://edirc.repec.org/data/deantco.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.