Staff Report 241

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Transaction Services, Inflation, and Welfare

S. Rao Aiyagari
R. Anton Braun
Zvi Eckstein - Consultant

Revised January 1, 1998

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.

Published In: Journal of Political Economy (Vol. 106, No. 6, December 1998, pp. 1274-1301)

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