AVOIDING THE INFLATION TAX

I study the effects of inflation on the purchasing behavior of buyers in the Lagos--Wright monetary economy. The standard framework fails to capture the long-standing intuition that when inflation increases, agents try to spend their money holdings speedily. I propose a simple, realistic extension i...

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Bibliographic Details
Published in:International economic review (Philadelphia) 2009-05, Vol.50 (2), p.607-625
Main Author: Ennis, Huberto M.
Format: Article
Language:English
Subjects:
Agency
Cash flow
Consumer behavior
Consumption
Cost analysis
Demand for money
Economic inflation
Economic models
Expenditure
Financial transactions
Impact analysis
Inflation
Inflation rates
Inflation tax
Market equilibrium
Monetary systems
Money
Steady state economies
Studies
Terms of trade
Trade
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Description
Summary:I study the effects of inflation on the purchasing behavior of buyers in the Lagos--Wright monetary economy. The standard framework fails to capture the long-standing intuition that when inflation increases, agents try to spend their money holdings speedily. I propose a simple, realistic extension in which buyers can rebalance their money holdings only sporadically (i.e., not every period). I show that, in such a case, higher inflation can induce buyers to spend their money faster by frontloading their consumption and searching more intensively for transactions. These trade distortions have, traditionally, been associated with the economic costs of inflation.
ISSN:0020-6598
1468-2354
DOI:10.1111/j.1468-2354.2009.00542.x