The Welfare cost of inflation is revisited with a search-theoretic model wherein distinct features of cash and checkable deposits as means of payment are incorporated. Our result implies that the presence of an interest-bearing checkable deposit amplifies the cost of inflation significantly via a channel of option value of money. Put differently, the cost of inflation is substantially underestimated under the assumption of non-interest-bearing M1. This is in stark contrast to the previous studies in which the assumption of non-interest-bearing M1 leads to a considerable overvaluation of an inflation cost. This finding provides the rationale for a low inflation target by the central bank where the payment system is highly developed.
{"title":"Cash, Checkable Deposits and Cost of Inflation","authors":"Man-jong Lee, Sung-guan Yun","doi":"10.2139/SSRN.2552948","DOIUrl":"https://doi.org/10.2139/SSRN.2552948","url":null,"abstract":"The Welfare cost of inflation is revisited with a search-theoretic model wherein distinct features of cash and checkable deposits as means of payment are incorporated. Our result implies that the presence of an interest-bearing checkable deposit amplifies the cost of inflation significantly via a channel of option value of money. Put differently, the cost of inflation is substantially underestimated under the assumption of non-interest-bearing M1. This is in stark contrast to the previous studies in which the assumption of non-interest-bearing M1 leads to a considerable overvaluation of an inflation cost. This finding provides the rationale for a low inflation target by the central bank where the payment system is highly developed.","PeriodicalId":251645,"journal":{"name":"Bank of Korea Economic Research Institute Research Paper Series","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-03-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116755943","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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