Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-22T21:56:39.216Z Has data issue: false hasContentIssue false
  • English
  • Français

SEARCH, WELFARE, AND THE “HOT POTATO” EFFECT OF INFLATION

Published online by Cambridge University Press:  19 December 2011

Ed Nosal
Ed Nosal*
Affiliation:
Federal Reserve Bank of Chicago
*
Address correspondence to: Ed Nosal, Research Department, Federal Reserve Bank of Chicago, 230 S. La Salle St., Chicago, IL 60604, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

An increase in inflation causes people to hold smaller real balances and to speed up their spending. Virtually all monetary models capture the first—inflation tax—effect. Few capture the second—hot potato—effect. Those that do associate negative welfare consequences with the hot potato effect. Because both the inflation tax and the hot potato effect imply that inflation has negative effects on welfare, an optimal monetary policy is characterized by the Friedman rule. In the model presented here, there is a hot potato effect, but—all else held constant—the hot potato effect has positive consequences for welfare. As a result, a departure from the Friedman rule can be socially desirable.

Keywords

Hot Potato EffectInflationWelfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S2: Money, Credit, and Liquidity: Part 2 , September 2011 , pp. 313 - 326
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Ennis, Huberto M. (2009) Avoiding the inflation tax. International Economic Review 50, 607–625.CrossRefGoogle Scholar
Kiyotaki, Nobuhiro and Wright, Randall (1991) A contribution to the pure theory of money. Journal of Economic Theory 53, 215–235.CrossRefGoogle Scholar
Lagos, Ricardo and Rocheteau, Guillaume (2005) Inflation, output and welfare. International Economic Review 46, 495–522.CrossRefGoogle Scholar
Li, Victor (1994) Inventory accumulation in a search-based monetary economy. Journal of Monetary Economics 34, 511–536.CrossRefGoogle Scholar
Liu, Lucy, Wang, Liang, and Wright, Randall (in press) On the “hot potato” effect of inflation: Intensive versus intensive margins. Macroeconomics Dynamics.Google Scholar
Rocheteau, Guillaume and Wright, Randall (2005) Money in search equilibrium, in competitive equilibrium and in competitive search equilibrium. Econometrica 73, 175–202.CrossRefGoogle Scholar
Tommasi, Mariano (1994) The consequences of price instability on search markets: Toward understanding the effects of inflation. American Economic Review 84, 1385–1396.Google Scholar
Tommasi, Mariano (1999) On high inflation and the allocation of resources. Journal of Monetary Economics 44, 401–421.CrossRefGoogle Scholar