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  • Rj430463s?file=thumbnail
    Creator: Aiyagari, S. Rao, Braun, R. Anton, and Eckstein, Zvi
    Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department)
    Number: 551
    Abstract:

    This paper is motivated by a variety of empirical observations on the comovements of currency velocity, inflation, and the relative size of the “credit services” sector. By the credit services sector we mean the part of banking and credit sector which provides alternative means of transactions to using currency as well as other services which help people economize on currency. We incorporate the credit services sector into a monetary growth model. Our model makes two specific and new contributions. The first is to show that direct quantitative evidence on the welfare cost of low inflation using measures of the relative size of an appropriately defined credit services sector for the U.S.—essentially the cost incurred by banks and credit unions in providing demand deposit and credit card services—is consistent with the welfare cost measured using an estimated money demand curve following the classic analysis of Bailey (1956) and the more recent analysis of Lucas (1993). Both of these measures amount to about 0.5 percent of GNP. The second contribution is in providing welfare cost of inflation estimates over a range of inflation rates which have some new features. We find that the total welfare cost of inflation remains bounded at about 5 percent of consumption.

    Subject (JEL): E51 - Money Supply; Credit; Money Multipliers and E31 - Price Level; Inflation; Deflation
  • S1784k80t?file=thumbnail
    Creator: Aiyagari, S. Rao and Eckstein, Zvi
    Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department)
    Number: 525
    Abstract:

    This paper is motivated by observations concerning the size of the banking sector and the growth rate of the economy before and after successful stabilizations of high inflations. The facts suggest that the relative size of the banking sector increases during a period of accelerating inflation and decreases immediately following a successful monetary stabilization. Furthermore, the GDP growth rate is lower during the high inflation period than after stabilization. The goal of this paper is to develop a monetary growth model which is qualitatively consistent with these observations. The model we use is a variant of the Lucas and Stokey (1987) model of cash and credit goods. The main innovation in our model is that while cash goods and credit goods are perfect substitutes in consumption we posit different technologies for their production. We show that the model’s predictions on the impact of a permanent stabilization are consistent with the main real and monetary observations on high inflation countries.

  • Fj2362246?file=thumbnail
    Creator: Aiyagari, S. Rao, Braun, R. Anton, and Eckstein, Zvi
    Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department)
    Number: 241
    Abstract:

    This paper is motivated by empirical observations on the comovements of currency velocity, inflation, and the relative size of the credit services sector. We document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money. Our model makes two new contributions. First, we show that direct evidence on the appropriately defined credit service sector for the United States is consistent with the welfare cost measured using an estimated money demand schedule. Second, we provide welfare cost of inflation estimates that have some new features.

    Subject (JEL): E31 - Price Level; Inflation; Deflation and E51 - Money Supply; Credit; Money Multipliers