‘This Arbitrary Rearrangement of Riches’: an Alternative Theory of the Costliness of Inflation
Description
This paper develops a model of the costliness of inflation that places the locus of costs in the bond market, rather than the money market. It argues that inflation is costly on account on the contraction of the bond market caused by the riskiness of inflation. The theory is premised upon the social function of bond markets as consisting of the transference of technological risk from those economic interests where risk is most concentrated (and so most painful) to interests where it is...[Show more]
dc.contributor.author | Coleman, William | |
---|---|---|
dc.date.accessioned | 2007-06-25T06:09:47Z | |
dc.date.accessioned | 2011-01-05T08:39:14Z | |
dc.date.available | 2007-06-25T06:09:47Z | |
dc.date.available | 2011-01-05T08:39:14Z | |
dc.date.created | 2007-05 | |
dc.identifier.isbn | 1 921262 24 9 | |
dc.identifier.issn | 1442-8636 | |
dc.identifier.uri | http://hdl.handle.net/1885/45283 | |
dc.description.abstract | This paper develops a model of the costliness of inflation that places the locus of costs in the bond market, rather than the money market. It argues that inflation is costly on account on the contraction of the bond market caused by the riskiness of inflation. The theory is premised upon the social function of bond markets as consisting of the transference of technological risk from those economic interests where risk is most concentrated (and so most painful) to interests where it is less concentrated (and so less painful). Using a Ramsey-Solow model with decision-makers maximising expected utility from consumption and real balances, the paper argues that unpredictable inflation impedes this useful transfer in risks secured by the bond market. Unpredictable inflation makes debt most costly when income is the most needed by debtors (since when the ex post real interest is highest, the debtor is in consequence the poorest), and credit the most remunerative when income is the least needed by creditors (since when the ex post real interest is the highest, the creditor is as a consequence richest). The upshot of these disincentives to borrow and lend is that less risk is transferred. Thus unpredictable inflation reduces the socially beneficial transfer of risks that a bond market secures. | |
dc.format.extent | 55 pages | |
dc.format.mimetype | application/pdf | |
dc.language.iso | en_AU | |
dc.publisher | Canberra, ACT: Centre for Economic Policy Research (CEPR), The Australian National University | |
dc.relation.ispartofseries | Discussion Paper (Centre for Economic Policy Research (CEPR), The Australian National University): no. 553 (May 2007) | |
dc.subject | inflation cost | |
dc.subject | inflation risk | |
dc.subject | debt | |
dc.title | ‘This Arbitrary Rearrangement of Riches’: an Alternative Theory of the Costliness of Inflation | |
dc.type | Working/Technical Paper | |
local.description.refereed | no | |
local.rights.ispublished | yes | |
dc.date.issued | 2007-05 | |
local.contributor.affiliation | CEPR, RSSS | |
local.contributor.affiliation | ANU | |
dcterms.accessRights | Open Access | |
Collections | ANU Centre for Economic Policy Research (CEPR) |
Download
File | Description | Size | Format | Image |
---|---|---|---|---|
DP553.pdf | 243.85 kB | Adobe PDF |
Items in Open Research are protected by copyright, with all rights reserved, unless otherwise indicated.
Updated: 17 November 2022/ Responsible Officer: University Librarian/ Page Contact: Library Systems & Web Coordinator