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Endogenous Money, Inflation and Welfare

Author

Listed:
  • Espen Henriksen

    (University of Oslo)

  • Finn Kydland

    (University of California, Santa Barbara)

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. (Copyright: Elsevier)

Suggested Citation

  • Espen Henriksen & Finn Kydland, 2010. "Endogenous Money, Inflation and Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 470-486, April.
    • Handle: RePEc:red:issued:07-125
    DOI: 10.1016/j.red.2009.09.003
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    References listed on IDEAS

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    1. Seater, John J., 1985. "On the construction of marginal federal personal and social security tax rates in the U.S," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 121-135, January.
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    Cited by:

    1. Dia, Enzo & VanHoose, David, 2017. "Banking in macroeconomic theory and policy," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 149-160.
    2. repec:ipg:wpaper:2014-474 is not listed on IDEAS
    3. Wen, Yi, 2015. "Money, liquidity and welfare," European Economic Review, Elsevier, vol. 76(C), pages 1-24.
    4. Dressler, Scott J. & Kersting, Erasmus K., 2015. "Excess reserves and economic activity," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 17-31.
    5. Miller, Stephen M. & Martins, Luis Filipe & Gupta, Rangan, 2019. "A Time-Varying Approach Of The Us Welfare Cost Of Inflation," Macroeconomic Dynamics, Cambridge University Press, vol. 23(2), pages 775-797, March.
    6. Yi Wen, 2012. "Liquidity and welfare," Working Papers 2012-037, Federal Reserve Bank of St. Louis.
    7. Özbilgin, Murat H., 2012. "Currency substitution, inflation, and welfare," Journal of Development Economics, Elsevier, vol. 99(2), pages 358-369.
    8. Coleman, Simeon, 2012. "Where Does the Axe Fall? Inflation Dynamics and Poverty Rates: Regional and Sectoral Evidence for Ghana," World Development, Elsevier, vol. 40(12), pages 2454-2467.
    9. Dressler, Scott, 2016. "A long-run, short-run, and politico-economic analysis of the welfare costs of inflation," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 255-269.
    10. H. Murat Ozbilgin, 2010. "Welfare Gains from Disinflation in an Economy With Currency Substitution (Para Ikamesinin Oldugu Bir Ekonomide Enflasyonun Dusurulmesinden Kaynaklanan Refah Kazanimlari)," Working Papers 1009, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    11. Mao, Sheng-Zhi & Huang, Chien-Yu & Chang, Juin-Jen, 2019. "Growth effects and welfare costs in an innovation-driven growth model of money and banking," Journal of Macroeconomics, Elsevier, vol. 62(C).
    12. Garín, Julio & Lastrapes, William D. & Lester, Robert, 2021. "On the welfare effects of phasing out paper currency," European Economic Review, Elsevier, vol. 137(C).
    13. Ben Lockwood & Erez Yerushalmi, 2019. "How should payment services be taxed?," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(1), pages 21-47, June.

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    More about this item

    Keywords

    Endogenous money; Welfare cost of inflation; Transaction technologies; Seigniorage; Marginal cost of public funds;
    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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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