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.
Original language | English |
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Pages (from-to) | 153-183 |
Journal | American Economic Journal: Macroeconomics |
Volume | 4 |
Issue number | 2 |
DOIs | |
Publication status | Published - 1 Jan 2012 |
Keywords
- Transactions demand
- Interest-rates
- Money demand