Working Paper
The Cost of Inflation: A Mechanism Design Approach
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.
Suggested Citation
Rocheteau, Guillaume. 2011. “The Cost of Inflation: A Mechanism Design Approach .” Federal Reserve Bank of Cleveland, Working Paper No. 11-03. https://doi.org/10.26509/frbc-wp-201103
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