Endogenous money,inflation, and welfare |
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Authors: | Espen Henriksen Finn E Kydland |
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Institution: | 1. Department of Economics, University of California–Santa Barbara, CA, United States;2. Department of Finance, Norwegian School of Economics and Business Adm. (NHH), Norway |
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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. |
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