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American Economic Journal: Macroeconomics: Vol. 4 No. 2 (April 2012)

AEJ: Macro Volume. 4, Issue 2 | Previous ArticleNext Article

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Rebalancing Frequency and the Welfare Cost of Inflation

Article 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.4.2.153

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)

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Authors

Silva, André C. (New U Lisbon)

JEL Classifications

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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