Deposit Spreads and the Welfare Cost of Inflation
Since bank deposits and currency are substitutes and banks have monopoly power, higher nominal interest rates lead to higher deposit spreads. This raises the cost of transaction services, increases bank profits and attracts entry into the banking sector. Taking these effects into account, a one percentage point increase in inflation has a welfare cost of 0.086% of GDP, 6.9 times higher than traditional estimates.
I am grateful to Adrien Auclert, William Barnett, Sebastian Di Tella, Javier Garcia Cicco, Ester Faia, Ryan Mattson, Daniel Paravisini and Isaac Sorkin for helpful comments. Ricardo de la O Flores provided outstanding research assistance. Correspondence: Department of Economics, Stanford University. 579 Serra Mall, Stanford, CA, 94305. Email: email@example.com The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Pablo Kurlat, 2019. "Deposit Spreads and the Welfare Cost of Inflation," Journal of Monetary Economics, .