The inflation tax and period length in cash-in-advance models

Abstract

The aim of this study is to focus on the frequency with which consumers conduct financial transactions, and the role that this plays in the determination of the money velocity, price level, transactions cost and consequently determination of welfare cost of inflation. We introduce a CIA model with a Baumol-Tobin transactions mechanism. This provides a contribution to the CIA literature by allowing the transactions period to be endogenous and contributes to the BaumolTobin model by placing the decision rules in a general equilibrium setting. We find that the transactions period length is an integral part of the behavior of the monetary economy.