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Inflation, Credit, and Indexed Unit of Account

Author

Listed:
  • Hyung Sun Choi

    (Department of Economics, Kyung Hee University, Seoul, Republic of Korea)

  • Ohik Kwon

    (Department of Economics, Korea University, Seoul, Republic of Korea)

  • Manjong Lee

    (Department of Economics, Korea University, Seoul, Republic of Korea)

Abstract

A simple monetary model is constructed to study the implications of an indexed unit of account (Indexed-UoA). In an economy with an Indexed-UoA, credit trade friction attributed to inflation is resolved and there is no redistributional effect from unexpected inflation between debtors and creditors. However, in an economy without an Indexed-UoA, credit trades occur only if inflation is not too high and unexpected inflation renders debtors better off but creditors worse off. Adopting a medium of exchange as a unit of account is most apposite for a low-inflation economy, whereas introducing an alternative Indexed-UoA enhances welfare in an economy where inflation undermines credit trades.

Suggested Citation

  • Hyung Sun Choi & Ohik Kwon & Manjong Lee, 2013. "Inflation, Credit, and Indexed Unit of Account," Discussion Paper Series 1307, Institute of Economic Research, Korea University.
    • Handle: RePEc:iek:wpaper:1307
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    File URL: http://econ.korea.ac.kr/~ri/WorkingPapers/w1307.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    indexed unit of account; deferred payment; inflation; welfare;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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