Individual and Aggregate Money Demands: Theory and an Application to the Welfare Cost of Inflation

摘要: This paper introduces a model in which the distribution of money holdings is non-degenerate in equilibrium. I use the model to evaluate the effects of endogenous market segmentation and to measure the cost of inflation. Endogenous segmentation is important to fit the data on real balances and interest rates. I write analytical expressions for individual and aggregate money demands and for the welfare cost of inflation. As inflation increases, agents use more resources for financial transfers and consumption varies more. The effect on financial transfers is stronger: the welfare cost is similar for various degrees of intertemporal substitution.