The Welfare Cost of Inflation and the Regulations of Money Substitutes
This paper studies the possibility of using financial regulation that prohibits the use of money substitutes as a tool for mitigating the adverse effects of deviations from the Friedman rule. When inflation is not too high regulation aimed at elimi...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/02/25861087/welfare-cost-inflation-regulations-money-substitutes http://hdl.handle.net/10986/23730 |
| Summary: | This paper studies the possibility of
using financial regulation that prohibits the use of money
substitutes as a tool for mitigating the adverse effects of
deviations from the Friedman rule. When inflation is not too
high regulation aimed at eliminating money substitutes
improves welfare by economizing on transaction costs. The
gains from regulation depend on the distribution of income
and the level of direct taxation. The area under the demand
for money curve is equal to the welfare cost of inflation
only when there are no direct taxes and no proportional
intermediation cost: otherwise, the area under the demand
curve overstates the welfare cost of inflation when money
substitutes are not important and understates the welfare
cost when money substitutes are important. |
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