The welfare cost of inflation in a cash-in-advance economy with costly credit

Gillman, Max 1993. The welfare cost of inflation in a cash-in-advance economy with costly credit. Journal of Monetary Economics 31 (1) , pp. 97-116. 10.1016/0304-3932(93)90018-B

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Abstract

The paper presents a modification of the Lucas-Stokey (1983) cash-in-advance economy in which the representative consumer decides, based on relative prices, which goods to buy with cash and which with costly credit. An explicit Baumol (1952) condition emerges that guides this consumer choice. Deriving and estimating a closed-form welfare cost function in an example economy, the paper shows that the welfare cost of inflation depends on the margins of substitution. The consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash-in-advance economies.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HJ Public Finance H Social Sciences > HV Social pathology. Social and public welfare
Publisher:	Elsevier
ISSN:	0304-3932
Last Modified:	19 Mar 2016 23:12
URI:	https://orca.cardiff.ac.uk/id/eprint/42537

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