Economics, Econometrics and Finance
4 years ago

Inflation boosts spending, lowers interest rates, and maximizes real balances.

National Bureau of Economic Research
Inflation, Monetary Velocity, and Welfare
Paúl Krugman, Torsten Persson, Lars E.O. Svensson

Paper Summary

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The article explores how inflation affects the economy by studying the relationship between money, bonds, and monetary policy. It uses a model of a monetary economy with a capital market to show that as inflation increases, the speed at which money circulates also increases. The best monetary policy is one that maximizes real balances, and inflation can lower the real interest rate.