The welfare effects of mitigating the costs of inflation are examined. In a model where money reduces transactions costs, a fall in inflation costs is equivalent to financial innovation. This can be caused by paying interest on deposits, indexing money, or “dollarizing.” Results indicate that financial innovation raises welfare in low-inflation economies while reducing it in high-inflation economies because of the offsetting indirect effect of higher inflation to finance the budget.

Abstract

The welfare effects of mitigating the costs of inflation are examined. In a model where money reduces transactions costs, a fall in inflation costs is equivalent to financial innovation. This can be caused by paying interest on deposits, indexing money, or “dollarizing.” Results indicate that financial innovation raises welfare in low-inflation economies while reducing it in high-inflation economies because of the offsetting indirect effect of higher inflation to finance the budget.

Volume 38 (1991) comprises four issues, as follows:

March, pages 1–234

June, pages 235–446

September, pages 447–674

December, pages 675–941

Authors

Adams, Charles, and Bankim Chadha, Structural Models of the Dollar 525

Adams, Charles, and Bankim Chadha. On Interpreting the Random Walk and Unit Root in Nominal and Real Exchange Rates 901

Andersson, Krister. Taxation and the Com ut Capital in Hungary and Poland: A Comparison with Selected European Countries. 327

Axilrod. Stephen H. Issues in Interest Rate Management and Liberalization: Comment on Leite and Sundararajan 229

Barnett. Richard R and Peter Smith. The 1990 Reform of U.K. Local Authority Finance—An Alternative Analysis: Comment on Bayoumi. 666

Bartolini, Leonardo, and Avinash Dixit. Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors. 828

Bayoumi, Tamim. The 1990 Reform of U.K. Local Authority Finance 216

Bayoumi. Tamim. The 1990 Reform of U.K. Local Authority Finance — An Alternative Analysis—Reply to Barnett and Smith., 671

Bomhoff, Eduard J. Stability of Velocity in the Major Industrial Countries: A Kalman Filter Approach 626

Borensztcin, Eduardo, and Manmohan S. Kumar. Proposals for Privatization in Eastern Europe 300

Boughton, James M. Long-Run Money Demand in Large Industrial Countries.1

Bovenberg, A. Lans, Jeroen J.M. Kremers, and Paul R. Masson. Economic and Monetary Union in Europe and Constraints on National Budgetary Policies,. 374

Calvo. Guillermo A,, and Jacob A. Frenkel. From Centrally Planned to Market Economy: The Road from CPE to PCPE 268

Calvo, Guillermo A. The Perils of Sterilization 921

Chadha. Bankim. Wages, Profitability, and Growth in a Small Open Economy 59

Chadha, Bankim, and Charles Adams. Structural Models of the Dollar 525

Chadha, Bankim, and Charles Adams. On Interpreting the Random Walk and Unit Root in Nominal and Real Exchange Rates 901

De Gregorio, José. Welfare Costs of Inflation, Seigniorage, and Financial Innovation 675

Dixit, Avinash. The Optimal Mix of Inflationary Finance and Commodity Taxation with Collection Lags 643

Dixit, Avinash, and Leonardo Bartolini. Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors 828

Ebrill, Liam P., and Steven M. Fries. Broad Money Growth and Inflation in the United States 736

Frenkel, Jacob A., and Guillermo A. Calvo, From Centrally Planned to Market Economy: The Road from CPE to PCPE 268

Frenkel, Jacob A., and Morris Goldstein. Monetary Policy in an Emerging European Economic and Monetary Union: Key Issues 356

Frenkel, Jacob A., Assaf Razin, and Steven Symansky. International VAT Harmonization: Macroeconomic Effects 789

Fries, Steven M., and Liam P. Ebrill. Broad Money Growth and Inflation in the United States 736

Goldstein, Morris, and Jacob A. Frenkel. Monetary Policy in an Emerging European Economic and Monetary Union: Key Issues 356

Greene, Joshua, and Delano Villanueva. Private Investment in Developing Countries: An Empirical Analysis 33

Kenen, Peter B. Transitional Arrangements for Trade and Payments Among the CMEA Countries 235

Khor, Hoe E,, and Liliana Rojas-Suarez. Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Credit-worthiness 850

Kremers, Jeroen J.M., A, Lans Bovenberg, and Paul R. Masson. Economic and Monetary Union in Europe and Constraints on National Budgetary Policies 374

Kumar, Manmohan S., and Eduardo Borensztein. Proposals for Privatization in Eastern Europe 300

Lahiri, Ashok Kumar. Money and Inflation in Yugoslavia 751

Lizondo, J. Saúl. Alternative Dual Exchange Market Regimes: Some Steady-State Comparisons 560

Masson, Paul R., A. Lans Bovenberg, and Jeroen J.M. Kremers. Economic and Monetary Union in Europe and Constraints on National Budgetary Policies 374

Mendoza, Enrique G. Capital Controls and the Gains from Trade in a Business Cycle Model of a Small Open Economy 480

Miller, Marcus, and Paul Weller. Currency Bands, Target Zones, and Price Flexibility 184

Montiel, Peter J. The Transmission Mechanism for Monetary Policy in Developing Countries 83

Montiel, Peter J., and Jonathan D. Ostry. Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries 872

Ostry, Jonathan D. Trade Liberalization in Developing Countries: Initial Trade Distortions and Imported Intermediate Inputs 447

Ostry, Jonathan D., and Peter J. Montiel. Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries 872

Perraudin, W, R. M., and T. Pujol. European Fiscal Harmonization and the French Economy 399

Pujol, T., and W.R.M. Perraudin, European Fiscal Harmonization and the French Economy 399

Razin, Assaf, Jacob A. Frenkel, and Steven Symansky. International VAT Harmonization: Macroeconomic Effects 789

Reinhart, Carmen M. Fiscal Policy, the Real Exchange Rate, and Commodity Prices 506

Reinhart, Carmen M., and Vincent R. Reinhart. Output Fluctuations and Monetary Shocks: Evidence from Colombia 705

Reinhart, Vincent R., and Carmen M. Reinhart. Output Fluctuations and Monetary Shocks: Evidence from Colombia 705

Rojas-Suarez, Liliana, and Hoe E. Khor. Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness 850

Sadka, Efraim. An Inflation-Proof Tax System? Some Lessons from Israel 135

Scott, Louis O. Financial Market Volatility: A Survey 582

Smith, Peter, and Richard R. Barnett. The 1990 Reform of U.K. Local Authority Finance—An Alternative Analysis: Comment on Bayoumi 666

Svensson, Lars E.O. The Simplest Test of Target Zone Credibility 655

Symansky, Steven, Jacob A. Frenkel, and Assaf Razin. International VAT Harmonization: Macroeconomic Effects 789

Takagi, Shinji. Exchange Rate Expectations: A Survey of Survey Studies 156

Towe, Christopher M. The Budgetary Control and Fiscal Impact of Government Contingent Liabilities 109

Villanueva, Delano, and Joshua Greene. Private Investment in Developing Countries: An Empirical Analysis 33

Weller, Paul, and Marcus Miller. Currency Bands, Target Zones, and Price Flexibility 184

Titles

Alternative Dual Exchange Market Regimes: Some Steady-State Comparisons. By J. Saúl Lizondo 560

Broad Money Growth and Inflation in the United States. By Liam P. Ebrill and Steven M. Fries 736

The Budgetary Control and Fiscal Impact of Government Contingent Liabilities. By Christopher M. Towe 109

Capital Controls and the Gains from Trade in a Business Cycle Model of a Small Open Economy. By Enrique G. Mendoza 480

Currency Bands, Target Zones, and Price Flexibility. By Marcus Miller and Paul Weller 184

Economic and Monetary Union in Europe and Constraints on National Budgetary Policies. By A. Lans Bovenberg, Jeroen J.M. Kremers, and Paul R. Masson 374

European Fiscal Harmonization and the French Economy. By W.R.M. Perraudin and T. Pujol 399

Exchange Rate Expectations: A Survey of Survey Studies. By Shinji Takagi 156

Financial Market Volatility: A Survey. By Louis O. Scott 582

Fiscal Policy, the Real Exchange Rate, and Commodity Prices. By Carmen M. Reinhart 506

From Centrally Planned to Market Economy: The Road from CPE to PCPE. By Guillermo A. Calvo and Jacob A. Frenkel 268

An Inflation-Proof Tax System? Some Lessons from Israel. By Efraim Sadka 135

Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness. By Hoe E. Khor and Liliana Rojas-Suarez 850

International VAT Harmonization: Macroeconomic Effects. By Jacob A. Frenkel, Assaf Razin, and Steven Symansky 789

Issues in Interest Rate Management and Liberalization: Comment on Leite and Sundararajan. By Stephen H. Axilrod 229

Long-Run Money Demand in Large Industrial Countries. By James M. Boughton 1

Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries. By Peter J. Montiel and Jonathan D. Ostry 872

Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors. By Leonardo Bartolini and Avinash Dixit 828

Monetary Policy in an Emerging European Economic and Monetary Union: Key Issues. By Jacob A. Frenkel and Morris Goldstein 356

Money and Inflation in Yugoslavia. By Ashok Kumar Lahiri 751

The 1990 Reform of U.K. Local Authority Finance. By Tamim Bayoumi 216

The 1990 Reform of U.K. Local Authority Finance—An Alternative Analysis: Comment on Bayoumi. By Richard R., Barnett and Peter Smith 666

The 1990 Reform of U.K. Local Authority Finance—An Alternative Analysis: Reply to Barnett and Smith. By Tamim Bayoumi 671

On Interpreting the Random Walk and Unit Root in Nominal and Real Exchange Rates. By Charles Adams and Bankim Chadha 901

The Optimal Mix of Inflationary Finance and Commodity Taxation with Collection Lags. By Avinash Dixit 643

Output Fluctuations and Monetary Shocks: Evidence from Colombia. By Carmen M. Reinhart and Vincent R. Reinhart 705

The Perils of Sterilization. By Guillermo A. Calvo 921

Private Investment in Developing Countries: An Empirical Analysis. By Joshua Greene and Delano Villanueva 33

Proposals for Privatization in Eastern Europe. By Eduardo Borensztein and Manmohan S. Kumar 300

The Simplest Test of Target Zone Credibility. By Lars E.O. Svensson 655

Stability of Velocity in the Major Industrial Countries: A Kalman Filter Approach. By Eduard J. Bomhoff 626

Structural Models of the Dollar. By Charles Adams and Bankim Chadha 525

Taxation and the Cost of Capital in Hungary and Poland: A Comparison with Selected European Countries. By Krister Andersson 327

Trade Liberalization in Developing Countries: Initial Trade Distortions and Imported Intermediate Inputs. By Jonathan D. Ostry 447

Transitional Arrangements for Trade and Payments Among the CMEA Countries. By Peter B. Kenen 235

The Transmission Mechanism for Monetary Policy in Developing Countries. By Peter J. Montiel 83

Wages, Profitability, and Growth in a Small Open Economy. By Bankim Chadha 59

Welfare Costs of Inflation, Seigniorage, and Financial Innovation. By José De Gregorio 675

Subjects

To facilitate electronic storage and retrieval of bibliographic data, Staff Papers has adopted, beginning with Number 2 (June) of Volume 38, the new subject classification scheme of the Journal of Economic Literature (Nashville, Tennessee). Articles appearing in Number 1 (March) of Volume 38 are listed under the old classification scheme.

NUMBER 1 (MARCH)

023 Macroeconomic Theory

Private Investment in Developing Countries: An Empirical Analysis. By Joshua Greene and Delano Villanueva 33

110 Economic Growth; Development; Planning Theory and Policy

Wages, Profitability, and Growth in a Small Open Economy. By Bankim Chadha 59

121 Economic Studies of Developing Countries

Private Investment in Developing Countries: An Empirical Analysis. By Joshua Greene and Delano Villanueva 33

Wages, Profitability, and Growth in a Small Open Economy. By Bankim Chadha 59

The Transmission Mechanism for Monetary Policy in Developing Countries. By Peter J. Montiel 83

130 Economic Fluctuations; Forecasting; Stabilization; Inflation

An Inflation-Proof Tax System? Some Lessons from Israel. By Efraim Sadka 135

211 Econometric and Statistical Methods and Models

Long-Run Money Demand in Large Industrial Countries. By James M. Boughton 1

221 National Income Accounting

Private Investment in Developing Countries: An Empirical Analysis. By Joshua Greene and Delano Villanueva 33

311 Domestic Monetary and Financial Theory and Policy

Long-Run Money Demand in Large Industrial Countries. By James M. Boughton 1

The Transmission Mechanism for Monetary Policy in Developing Countries. By Peter J. Montiel 83

320 Fiscal Theory and Policy

The Budgetary Control and Fiscal Impact of Government Contingent Liabilities. By Christopher M. Towe 109

An Inflation-Proof Tax System? Some Lessons from Israel. By Efraim Sadka 135

324 State and Local Government Finance

The 1990 Reform of U.K. Local Authority Finance. By Tamim Bayoumi 216

325 Intergovernmental Financial Relationships

The 199-Reform of U.K. Local Authority Finance. By Tamim Bayoumi 216

410 International Trade Theory

Wages, Profitability, and Growth in a Small Open Economy. By Bankim Chadha 59

431 Open Economy Macroeconomics; Exchange Rates

Long-Run Money Demand in Large Industrial Countries. By James M. Boughton 1

Exchange Rate Expectations: A Survey of Survey Studies. By Shinji Takagi 156

Currency Bands, Target Zones, and Price Flexibility. By Marcus Miller and Paul Weller 184

432 International Monetary Arrangements

Currency Bands, Target Zones, and Price Flexibility, By Marcus Miller and Paul Weller 184

NUMBERS 2, 3, and 4 (JUNE, SEPTEMBER, and DECEMBER)

C Mathematical and Quantitative Methods

C12 Hypothesis Testing Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness. By Hoe E. Khor and Liliana Rojas-Suarez 850

C5 Econometric Modeling On Interpreting the Random Walk and Unit Root in Nominal and Real Exchange Rates. By Charles Adams and Bankim Chadha 901

D Microeconomics

D58 Computable and Other Applied General Equilibrium Models European Fiscal Harmonization and the French Economy. By W.R.M. Perraudin and T. Pujol 399

E Macroeconomics and Monetary Economics

E2 Consumption, Saving, Production, Employment, and Investment International VAT Harmonization: Macroeconomic Effects. By Jacob A. Frenkel, Assaf Razin, and Steven Symansky 789

E3 Prices, Business Fluctuations, and Cycles Output Fluctuations and Monetary Shocks: Evidence from Colombia. By Carmen M. Reinhart and Vincent R. Reinhart 705

E31 Price Level; Inflation; Deflation Broad Money Growth and Inflation in the United States. By Liam P. Ebrill and Steven M. Fries 736

Money and Inflation in Yugoslavia. By Ashok Kumar Lahiri 751

E32 Business Fluctuations; Cycles Capital Controls and the Gains from Trade in a Business Cycle Model of a Small Open Economy. By Enrique G. Mendoza 480

E37 Forecasting and Simulation Broad Money Growth and Inflation in the United States, By Liam P. Ebrill and Steven M. Fries 736

E41 Demand for Money Stability of Velocity in the Major Industrial Countries: A Kalman Filter Approach. By Eduard J. Bomhoff 626

Money and Inflation in Yugoslavia. By Ashok Kumar Lahiri 751

E44 Financial Markets and the Macroeconomy Financial Market Volatility: A Survey. By Louis O. Scott 582

E50 Welfare Costs of Inflation, Seigniorage, and Financial Innovation. By José De Gregorio 675

E51 Money Supply; Credit; Money Multipliers The Optimal Mix of Inflationary Finance and Commodity Taxation with Collection Lags. By Avinash Dixit 643

E52 Monetary Policy (Targets, Instruments, and Effects) Stability of Velocity in the Major Industrial Countries: A Kalman Filter Approach. By Eduard J. Bomhoff 626

Broad Money Growth and Inflation in the United States. By Liam P. Ebrill and Steven M. Fries 736

E58 Central Banks and Their Policies Money and Inflation in Yugoslavia. By Ashok Kumar Lahiri 751

E6 Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook International VAT Harmonization: Macroeconomic Effects. By Jacob A. Frenkel, Assaf Razin, and Steven Symansky 789

E60 General Welfare Costs of Inflation, Seigniorage, and Financial Innovation. By José De Gregorio 675

E62 Fiscal Policy; Public Expenditures and Finance; Taxation Taxation and the Cost of Capital in Hungary and Poland; A Comparison with Selected European Countries. By Krister Andersson 327

Economic and Monetary Union in Europe and Constraints on National Budgetary Policies. By A. Lans Bovenberg, Jeroen J.M. Kremers, and Paul R. Masson 374

E63 Comparative or Joint Analysis of Fiscal and Monetary or Stabilization Policy Money and Inflation in Yugoslavia. By Ashok Kumar Lahiri 751

F International Economics

F13 Commercial Policy; Protection; Promotion; Trade Negotiations Trade Liberalization in Developing Countries: Initial Trade Distortions and Imported Intermediate Inputs. By Jonathan D. Ostry 447

F30 International Finance—General From Centrally Planned to Market Economy: The Road from CPE to PCPE. By Guillermo A. Calvo and Jacob A. Frenkel 268

Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries. By Peter J. Montiel and Jonathan D. Ostry 872

F31 Exchange Rates; Foreign Exchange Intervention Structural Models of the Dollar. By Charles Adams and Bankim Chadha 525

Alternative Dual Exchange Market Regimes: Some Steady-State Comparisons. By J. Saul Lizondo 560

Stability of Velocity in the Major Industrial Countries: A Kalman Filter Approach. By Eduard J. Bomhoff 626

The Simplest Test of Target Zone Credibility. By Lars E.O. Svensson 655

Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness. By Hoe E. Khor and Liliana Rojas-Suarez 850

On Interpreting the Random Walk and Unit Root in Nominal and Real Exchange Rates. By Charles Adams and Bankim Chadha 901

The Perils of Sterilization. By Guillermo A. Calvo 921

F32 Current Account Adjustment; Short-Term Capital Movements Trade Liberalization in Developing Countries: Initial Trade Distortions and Imported Intermediate Inputs. By Jonathan D. Ostry 447

F33 International Monetary Arrangements and Institutions Transitional Arrangements for Trade and Payments Among the CMEA Countries. By Peter B. Kenen 235

Economic and Monetary Union in Europe and Constraints on National Budgetary Policies. By A. Lans Bovenberg, Jeroen J.M. Kremers, and Paul R. Masson 374

The Simplest Test of Target Zone Credibility. By Lars E.O. Svensson 655

F34 International Lending and Debt Problems Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors. By Leonardo Bartolini and Avinash Dixit 828

Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness. By Hoe E. Khor and Liliana Rojas-Suarez 850

F36 Financial Aspects of Economic Integration Monetary Policy in an Emerging European Economic and Monetary Union: Key Issues. By Jacob A. Frenkel and Morris Goldstein 356

F4 Macroeconomic Aspects of International Trade and Finance International VAT Harmonization: Macroeconomic Effects. By Jacob A. Frenkel, Assaf Razin, and Steven Symansky 789

F41 Open Economy Macroeconomics Trade Liberalization in Developing Countries: Initial Trade Distortions and Imported Intermediate Inputs. By Jonathan D. Ostry 447

Fiscal Policy, the Real Exchange Rate, and Commodity Prices. By Carmen M. Reinhart 506

Alternative Dual Exchange Market Regimes: Some Steady-State Comparisons. By J. Saúl Lizondo 560

Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries. By Peter J. Montiel and Jonathan D. Ostry 872

F42 International Policy Coordination Fiscal Policy, the Real Exchange Rate, and Commodity Prices. By Carmen M. Reinhart 506

G Financial Economics

G12 Asset Pricing Financial Market Volatility: A Survey. By Louis O. Scott 582

G14 Information and Market Efficiency Financial Market Volatility: A Survey. By Louis O. Scott 582

G15 International Financial Markets Taxation and the Cost of Capital in Hungary and Poland: A Comparison with Selected European Countries. By Krister Andersson 327

G20 Financial Institutions and Services—General From Centrally Planned to Market Economy: The Road from CPE to PCPE. By Guillermo A. Calvo and Jacob A. Frenkel 268

G32 Financing Policy; Capital and Ownership Structure Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors. By Leonardo Bartolini and Avinash Dixit 828

H Public Economics

H6 National Budget, Deficit, and Debt Economic and Monetary Union in Europe and Constraints on National Budgetary Policies. By A. Lans Bovenberg, Jeroen J.M. Kremers, and Paul R. Masson 347

H21 Efficiency; Optimal Taxation The Optimal Mix of Inflationary Finance and Commodity Taxation with Collection Lags. By Avinash Dixit 643

H22 Taxation and Subsidies—Incidence European Fiscal Harmonization and the French Economy. By W.R.M. Perraudin and T. Pujol 399

H25 Business Taxes Taxation and the Cost of Capital in Hungary and Poland: A Comparison with Selected Countries. By Krister Andersson 327

H62 Deficit Money and Inflation in Yugoslavia. By Ashok Kumar Lahiri 751

H87 International Fiscal Issues European Fiscal Harmonization and the French Economy. By W.R.M. Perraudin and T. Pujol 399

L Industrial Organization

L33 Boundaries of Public and Private Enterprise; Privatization; Contracting Out Proposals for Privatization in Eastern Europe. By Eduardo Borensztein and Manmohan S. Kumar 300

N Economic History

N12 United States; Canada: 1913–71 Capital Controls and the Gains from Trade in a Business Cycle Model of a Small Open Economy. By Enrique G. Mendoza 480

O Economic Development, Technological Change, and Growth

O54 Latin America; Caribbean Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness. By Hoe E. Khor and Liliana Rojas-Suarez 850

P Economic Systems

P21 Planning and Coordination of Socialist Economies From Centrally Planned to Market Economy: The Road from CPE to PCPE. By Guillermo A. Calvo and Jacob A. Frenkel 268

P22 Prices Money and Inflation in Yugoslavia. By Ashok Kumar Lahiri 751 P33 Foreign Trade and Investment Transitional Arrangements for Trade and Payments Among the CMEA Countries. By Peter B. Kenen 235

P50 Comparative Economic Systems—General Proposals for Privatization in Eastern Europe. By Eduardo Borensztein and Manmohan S. Kumar 300

In statistical matter throughout this issue,

  • dots (…) indicate that data are not available;

  • a dash (—) indicates that the figure is zero or less than half the final digit shown, or that the item does not exist;

  • a single dot (.) indicates decimals;

  • a comma (,) separates thousands and millions;

  • “billion” means a thousand million, and “trillion” means a thousand billion;

  • a short dash (—) is used between years or months (for example, 1989–91 or January–October) to indicate a total of the years or months inclusive of the beginning and ending years or months;

  • a stroke (/) is used between years (for example, 1990/91) to indicate a fiscal year or a crop year;

  • a colon (;) is used between a year and the number indicating a quarter within that year (for example, 1991:2);

  • Components of tables may not add to totals shown because of rounding.