Working Paper

The cost of inflation: a mechanism design approach

Abstract: I apply mechanism design to quantify the cost of inflation that can be attributed to monetary frictions alone. In an environment with pairwise meetings, the money demand that is consistent with a constrained-efficient allocation takes the form of a continuous correspondence that can fit the data over the period 1900-2006. For such parameterizations, the cost of moderate inflation is zero. This result is robust to different assumptions regarding the observability of money holdings, the introduction of match-specific heterogeneity, and endogeneous participation decisions.

Keywords: Inflation (Finance) - Mathematical models; Demand for money; Monetary theory;

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2011

Number: 1103